The best income stream on offer for local investors comes from ASX shares. With term deposits paying you only enough to keep up with inflation, there’s simply no way of generating a decent income unless we look elsewhere.
Here are two companies which are trading on very strong yields, that seem sustainable going forward.
JB Hi-Fi Limited (ASX: JBH)
JB Hi-Fi is a surprisingly high performing retailer. Over the last 10 years, the company has grown its earnings per-share by around 10% per annum, and increased the dividend by 13% per annum. Today JB Hi-Fi pays out around 65% of its profits as dividends, which appears to be a sustainable level. The total shareholder return has been 14% per annum over the last decade.
Despite fears of Amazon destroying retail in Australia, JB Hi-Fi is still performing well. Over FY 2018 it delivered another year of profit growth, with earnings up by 9.2%. Sales are continuing to grow, this year up 21.8%, and online sales jumping by 32.1%, which is a good sign that JB Hi-Fi can compete in an increasingly online world.
It’s still early days for online retail in Australia, so we’ll have to see if competition intensifies over the next few years. JB Hi-Fi currently trades on around 11 times earnings and a grossed-up dividend yield of 8.3%.
WAM Research Limited (ASX: WAX)
This listed investment company (LIC) is managed by the high performing team at Wilson Asset Management, which has managed LICs going back to 1999 with its flagship fund WAM Capital Limited (ASX: WAM).
WAM Research targets undervalued growth companies which have strong fundamentals and where the portfolio managers identify a catalyst that should result in the stock being re-rated by the market. This strategy has been working well over the years, delivering a portfolio return of 16.2% per annum before fees, since 2010, compared to the market’s return of 8.0% per annum.
The company uses its capital gains to pay out large fully franked dividends each year, while retaining some profit to smooth the income over time. Dividends have increased for 9 years in a row and it currently has around 3 years worth of dividends in the profit reserve. This means there’s a very low chance of a cut to shareholders’ income any time soon.
WAM Research currently trades at a premium to NTA of over 20%, so it looks a bit expensive. Despite that, the current dividend yield is a whopping 9.5% including franking credits.
Motley Fool contributor Dave Gow owns shares of WAM Capital Limited and WAM Research Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.