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Two 6%+ dividends that could power you to a million

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I do like seeing a new stock market flotation come good, and it’s even better when the company quickly powers its way to handsome dividends. That’s exactly what’s happened with Elegant Hotels Group (LSE: EHG), which reported interim results on Wednesday.

The owner and operator of hotels and a restaurant in Barbados floated on AIM in May 2015, and though the share price has been a bit rocky (it’s down 4% since then, to 86p), it rewarded income seekers with a 7.7% dividend yield last year — and analysts have yields of 6.9% pencilled-in for this year and next. So how is 2017 looking?

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Occupancy rates have fallen a little, to 66% from 69% at the same time last year, and adjusted pre-tax profit is down from $14.4m to $12.2m with adjusted EPS down from 12.9c to 11c — but forecasts do suggest a 24% EPS fall this year before a recovery in 2018.

The interim dividend was held at 3.5p per share, which bodes well for an impressive full-year payout.

Still growing

This is a company still in its growth phase, having lined up contracts for expansion into Antigua and St Lucia, and it seems quite surprising that it is paying such big dividends at this early stage. So the debt situation is something I’d be careful of, and net debt of $62m is way ahead of adjusted EBITDA of $15.3m.

But the freehold ownership of its hotels provides a lot of assets to stack against that, with the firm indicating an implied net asset value of 175p per share.

That suggests some undervaluation too, in addition to that tasty dividend, and that makes me cautiously bullish.

Insurance cash

My second pick is very different, but another big payer. It’s specialist insurer Lancashire Holdings Limited (LSE: LRE), and Neil Woodford holds it in his Woodford Equity Income Fund. It’s not hard to see why with its forecast dividend yield of a whopping 7.8% this year after big payouts over the past couple of years.

That’s part of the firm’s policy of returning surplus cash to shareholders when it doesn’t expect better returns elsewhere.

The other side of the coin is that earnings per share have been falling for the past few years, but that’s all part of the firm’s balanced and conservative approach. And when opportunities for earnings growth are there, its cash will be used to pursue those opportunities, rather than paying such a hefty dividend.

Sensible approach

I do like that approach over the single-minded pursuit of growth that has brought many a company to its knees, and which overstretched more than a few of Lancashire Holdings’ bigger sector rivals during the financial crisis.

The firm recorded an impressive return on tangible equity last year of 15.7% (up from 11.8%), which I reckon lends further support to its conservative business model. And though we’re still in a difficult market, as chief executive Alex Maloney pointed out at Q1 results time, the company will stick to its “track record of consistent underwriting discipline for the longer-term interests of our shareholders and counter parties.

There’s a forward P/E of around 15.5, which is higher than it’s been for a few years, but I see that as good value for a well-managed company that’s concentrating on long-term shareholder returns.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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