Can you ignore these 6% dividend yields?

Bilaal Mohamed discovers two shares with chunky dividends that he thinks investors can’t afford to miss.

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It’s been a tough few years for shareholders of Debenhams (LSE: DEB), with the UK’s largest department store seeing its profits drifting lower and the company’s share price following suit. But despite the difficulties, Debenhams has continued to reward shareholders with generous levels of dividend income and has maintained its full-year payouts at 3.4p per share for the last three years. But with another dip in underlying profits forecast for FY2016, can the chunky dividend payouts be sustained?

Cars and holidays

In its most recent update, the FTSE 250 retail giant said the public was spending less on clothing and more on cars and holidays, as it reported lower sales and shrinking margins in the third quarter of its financial year. The disappointing update came against a backdrop of rising new car sales in the UK, with new car registrations up again so far this year, after a record-breaking year in 2015. Furthermore, holidaymakers contributed to a strong season for Debenhams’ swimwear and luggage offerings, but other seasonal clothing sales had been poor, especially within womenswear.

Our friends in the Square Mile expect a 3% dip in profits for the full year, and a further 5% slide for fiscal 2017. On that basis it could be argued that the market’s low rating of the shares at just eight times earnings could be justified. But despite the lower earnings projections, the company is expected to hike its dividend this year to 3.47p per share, with a further increment to 3.51p next year, offering higher yields of 6.3% and 6.4% until FY2018. I think now could be a good time for income seekers to take advantage of this year’s share price weakness and grab a bite of that juicy dividend.

Rising dividends

Upmarket residential housebuilder Crest Nicholson (LSE: CRST) has enjoyed strong growth since it rejoined the London Stock Exchange back in February 2013. In the three years since, revenues have risen steadily from £526m to £805m, with pre-tax profits almost doubling to £154m. Investors who bought a slice of the company at its IPO price of 220p will have enjoyed watching the value of their stake almost triple to 604p just prior to the EU referendum. But of course all good things must come to an end, and Crest Nicholson tumbled to 335p within a fortnight of the historic vote as investors got caught-up in the panic and uncertainty.

The Surrey-based firm has lost a quarter of its value over the past year, leaving the shares looking undervalued at just seven times forecast earnings. But for me the healthy dividends remain the star attraction, with the battered share price sending the yield towards an incredible 7%. Shareholder payouts should continue to rise with ample dividend coverage even after analysts’ post-Brexit earnings downgrades. For me, Crest Nicholson remains a buy for both its long-term recovery potential and progressive dividend.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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