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4 stocks that yield high income

James Dunn suggests 4 stocks outside the major banks that have good yields for you to consider as part of your investment strategy.

Investing for income yield on the stock market is an essential part of an investment strategy, with the inescapable arithmetic caveat that share dividend yields rise as prices fall. The inverse of this relationship is that investors who thought they had “bought” a yield can watch helplessly as a share price fall negates all of this return, and more. And yield-oriented investors have certainly seen the impact of this in recent times, in the “big five” yield stocks of the Australian market, namely ANZ Bank, Commonwealth Bank, National Australia Bank, Westpac and Telstra.

Long-term share investors can reasonably expect a total return from their shareholdings comprising both capital gains and dividends to more than compensate for the risk of periods of price weakness and/or dividend pruning (even cessation, but certainly not for long). The best situation is to have both components moving nicely in your favour – but that is not always possible on the stock market.

The dividend side of the return depends on the strength of the earnings of the companies in your portfolio, and in uncertain economic environments, this cannot be guaranteed – which is the big question mark over dividend investing.

For instance, bank investors cannot be certain that the big lenders’ earnings and dividends will hold up in FY19 and FY20. According to Thomson Reuters’ estimates collation, only CBA is expected by analysts to boost its dividend in FY19, and even then, it is a minuscule rise, from 431 cents to 431.2 cents. Further out, to FY20, only ANZ and CBA are projected to pay a bigger dividend than they did in FY18.

Based on their most recent historical dividend amounts, the big banks offer the following fully franked yields in FY19:

There will certainly be investors prepared to buy the bank stocks on these yields, with the ever-present risk that share prices could fall, and that the actual dividends over the next couple of years could come in lower than those historical amounts. There is also the issue of what a Labor Party election win in 2019 could do to the treatment of franking credits, if investors are expecting full or partial rebates of unused franking credits.

For investors looking to diversify outside the big traditional dividend payers, here is a selection of four yield opportunities worth considering. These companies already offer an attractive income based on historical distributions, and Thomson Reuters’ consensus estimates point to the prospect of growth in those payouts in FY19.

 

1. MyState (MYS:ASX)

Market capitalisation: $398 million

FY19 historical yield: 6.5% fully franked, based on 28.75 cents FY18 dividend

FY19 estimated yield: 7% fully franked, on consensus dividend of 30.8 cents

Analysts’ consensus target price: $5.00

Although there are worries about the banks’ earnings, given the deteriorating housing situation in particular, this Tasmanian-based financial institution looks to be well-insulated.

MyState is underpinned in this situation by the fact that just under half (45.5%) of its $4.6 billion home-loan book is in the Apple Isle, which at the moment is well and truly the best-performing housing market in Australia. According to the CoreLogic December home value index results, where national dwelling values dropped by 4.8% in 2018 – marking the weakest housing market conditions since 2008 – Tasmania went completely against the trend, with dwelling values in Hobart rising by 8.7%, and values across regional Tasmania surging by 9.9%.

MyState focuses on high-quality lending, with investor and interest-only lending well below that of its peer group, and well within the regulatory guidelines. Buttressed by its Tasmanian base, growth is targeted to the eastern seaboard states, with a focus on lower loan-to-value (LVR) ratio loans with high asset quality.

The MyState Bank business generates 86% of group revenue: the rest comes from the Wealth business, which includes funds management, financial planning and trustee services business Tasmanian Perpetual Trustees.

 

2. Adairs (ADH:ASX)

Market capitalisation: $294 million

FY19 historical yield: 7.6% fully franked, based on 13.5 cents FY18 dividend

FY19 estimated yield: 8.2% fully franked, on consensus dividend of 14.5 cents

Analysts’ consensus target price: $2.40

Manchester and homewares specialist retailer Adairs has rebuilt is credibility after a disastrous profit downgrade in late 2016, in which it admitted that it got its inventory wrong in the crucial bed linen category, which accounts for about 40% of total sales.

But more recently, the stock has been marked down on the back of concerns that it is exposed to falling house prices. That is arguably the wrong way to look at Adairs: for example, if homeowners decide to stay put and renovate, Adairs could benefit. But the broader argument for Adairs is that it is actually driven (now that the market has regained confidence in how the company is managed) by fashion in home furnishings, rather than the housing market.

The company’s focus on large homemaker stores, its Linen Lovers loyalty program, and strong online sales growth have it positioned well. Online sales reached 13% of total sales in FY18 and the company expects to push that to 15% this year. Adairs has released guidance indicating a sales growth target of 9.5%–14% in FY19, and earnings before interest and tax (EBIT) growth of between 4.9%–13.7%.

The financial year got off to a good start, with the first 13 weeks of trade delivering like-for-like sales growth of 5.2% across stores and online – but as with all retailers, the Christmas season figures, and the half-year results, will be very eagerly awaited. Any shock guidance downgrade would be very unwelcome for the share price. In the absence of that, Adairs looks a nice yield prospect.

 

3. IVE Group (IGL:ASX)

Market capitalisation: $316 million

FY19 historical yield: 7.3% fully franked, based on 15.5 cents FY18 dividend

FY19 estimated yield: 8.4% fully franked, on consensus dividend of 18 cents

Analysts’ consensus target price: $2.78

From its printing base, IVE Group has built over the last decade an integrated print communications and marketing services provider, with strong market positions in commercial and digital printing, direct marketing, niche web offset printing, retail point of display and promotional merchandising.

The business’ broad reach enables its customers to communicate more effectively with their customers by creating, managing, producing and distributing content across multiple levels. The strength of the offering is shown by the roll-call of IVE Group’s major customers, which includes Commonwealth Bank, McDonalds, Optus, Telstra, Westpac, Coles and L’Oreal. Many of IVE’s services are essential to these customers’ businesses.

IVE has four operating divisions:

  • Kalido – A customer experience agency that helps brands prosper through creative concept development, digital services, customer analytics and marketing automation
  • Blue Star Group – Integrated print, point-of-sale, personalised communications, promotional products, warehouse and logistics services
  • Pareto Group – Fundraising strategy, data-driven solutions and telephone fundraising agency serving the not-for-profit sector
  • IVEO – the managed solutions business, which bundles IVE’s broad range of products and services into multi-channel solutions for customers.

After a healthy FY18 (revenue up 40%, net profit up 32%), IVE has not given sales or earnings guidance, other than to say it remains “confident that our earnings growth will continue,” and that “all key drivers of earnings growth are on track.”

At the FY18 annual general meeting (AGM) the company talked of a “pleasing start to FY19,” but the December half-year result will be critical – and again, any guidance shock would not be good, this close to the half-year result.

With a 71.5% payout ratio, IVE Group represents an attractive yield, if the consumer-based economy remains relatively healthy.

 

4. Super Retail (SUL:ASX)

Market capitalisation: $1.3 billion

FY19 historical yield: 7.6% fully franked, based on 49 cents FY18 dividend

FY19 estimated yield: 8% fully franked, on consensus dividend of 51 cents

Analysts’ consensus target price: $9.50

Retail group Super Retail is another stock where investors are nervous ahead of the half-year result – the stock was hit earlier in the month when adventure clothing and accessories chain Kathmandu reported weaker than expected Christmas and Boxing Day trading.

That was seen as an ominous sign for Super Retail, which bought rival outdoor business Macpac last year. Compounding the market’s worry, Super Retail’s BCF business also sells outdoor clothing, although the boating, camping and fishing focus of BCF actually has little overlap with the more adventure-style offering of Macpac and Kathmandu.

Super Retail’s portfolio of retail brands also includes Ray’s Outdoors and the diversifying elements of Super Cheap Auto, Rebel Sports and Amart Sports, as well as Auto Trade Direct, which supplies auto parts and accessories to auto mechanics. In particular, the automotive business underpins the company.

Super Retail has been hammered 32% lower by the stock market since its October AGM: even if the December half-year result is weak, arguably much of that concern has already been taken out of an overly ambitious share price. At these levels, Super Retail looks to be good buying on yield grounds.
 

Final note

While investing for income can be a sensible part of an investment strategy, remember that high yields can at times become a risky proposition. Classic cases in the past, such as Telstra and Woolworths’ announcements of dividend cuts back in 2017, highlight that investors shouldn’t make decisions purely based on attractive historical yields.

High dividends can be fantastic – but not at the expense of safety. It’s important for investors to consider surrounding factors that make a yield sustainable such as a company’s earnings growth, cash flows, payout ratio and level of debt.

As the old saying goes “if it seems too good to be true, it probably is”, and a good principle to apply is ensuring a diversified portfolio.


About the Author
James Dunn , Switzer Group

James Dunn is an author at Switzer Report, freelance finance journalist and media consultant. James was founding editor of Shares magazine, and formerly, the personal investment editor at The Australian. His first book, Share Investing for Dummies, was published by John Wiley & Co. in September 2002: a second edition was published in March 2007, and a third edition was published in April 2011. There have also been two editions of the mini-version, Getting Started in Shares for Dummies. James is also a regular finance commentator on Australian radio and television.