Two 6% yields I’d buy today, and one I’d sell

Roland Head takes a fresh look at three value stocks with high yields.

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Dividend stocks are one of the few ways that ordinary investors can generate a decent cash income from their investments. But they aren’t without risk. Even the best-run companies can be forced to cut their payout during hard times.

Today I’m looking at three stocks which each offer a forecast yield of about 6%. Two of them are companies I believe are attractive contrarian buys, but one is a company I’d rather not own.

Get ahead of the crowd

Emerging markets have been out of favour with institutional investors over the last year or so. This has led to a fall in funds under management for emerging market asset managers such as Aberdeen Asset Management (LSE: ADN).

However, Aberdeen’s rival Ashmore Group pointed out last week that institutional investors are currently underweight in emerging markets. Ashmore’s figures suggest that investment returns from these markets are improving. If institutional money starts to flow back into this sector, profits at specialist fund managers could rise quickly.

Aberdeen’s 2017 earnings per share are expected to be about 25% lower than in 2013. With the shares trading on a forecast P/E of 13 and offering a 6.3% prospective yield, I think now could be a good time to buy for medium-term gains.

It makes sense to bet elsewhere

The future looks uncertain for spread betting firms such as CMC Markets (LSE: CMCX). The high profit margins enjoyed by these firms are partly dependent on them offering retail trading customers a lot of leverage. The FCA and other European regulators have announced plans to restrict this gearing to protect customers from losses.

CMC has already admitted that the proposed changes will “undoubtedly present the group with some short- to medium-term challenges”. In my opinion, these are likely to mean that the firm’s trailing P/E of 7 is not a reliable guide to its likely performance. The latest consensus forecasts suggest that earnings will fall by 20% in 2016/17 and by 13% in 2017/18. In reality, even these figures are just guesswork at this early stage.

It’s possible that spread betting firms will adapt and thrive. But if you want to bet on a recovery in this sector, I’d choose FTSE 250 member IG Group. IG is bigger, more diversified and more profitable. CMC’s 6.7% forecast yield seems much too risky to me.

Shopping for bargains

The retail sector is not popular with investors at the moment. But I believe that potential bargains are starting to emerge.

One possible choice is department store Debenhams (LSE: DEB). The group’s shares have fallen by 26% over the last year, and now trade on a trailing P/E of just seven.

The main reason for this is that the group’s adjusted earnings are expected to fall by 15% to 6.7p per share this year. However, even at this level, earnings should still cover the 3.4p dividend twice over. This suggests to me that Debenhams’ 6.1% forecast yield could be pretty safe for now.

I think there’s still a future for bricks-and-mortar retailers with a strong online presence. Ex-Amazon chief executive Sergio Bucher is expected to announce details of his strategy for the firm in the spring. Barring any surprises, I believe the shares could be a decent income buy at current levels.

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.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended Aberdeen Asset Management. 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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