Why these unloved 7% yielders could make you a millionaire retiree

Roland Head highlights a contrarian pick from his own portfolio.

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Shares of greeting card retailer Card Factory (LSE: CARD) rose by nearly 4% after the firm issued a trading statement this morning. That suggests to me that the market is gaining confidence in the group’s ability to pay a 7% dividend this year.

Card Factory isn’t the only stock with a forecast yield of 7%, and in this article I’m going to explain why I believe these high-yield stocks could offer buying opportunities for contrarian investors.

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Very profitable

Card Factory’s low-cost model encompasses in-house design, printing and warehousing operations. In contrast to many companies, it has become very profitable by keeping direct control of all elements of its business.

The group now has more than 900 stores and an online operation. During the nine months to 31 October, total sales rose by 6.7%. This compares to an increase of 4.4% for the same period last year.

That appears to be a healthy rate of growth. My only concern is that 38 new stores were opened during the period. Today’s update didn’t explain how much of the sales growth was like-for-like, and how much was the result of those openings. It may be that existing store sales aren’t growing very fast.

Dividend clarity

Shareholders will receive the majority of this year’s dividend in December, when the firm pays out its interim dividend of 2.9p, plus a special dividend of 15p per share.

There’s no guarantee that such a large special dividend will be affordable next year. Indeed, analysts are forecasting a 29% drop in the total payout for 2018/19, to 15.1p per share. That’s equivalent to a forecast yield of 5.4%.

My view is that Card Factory is a cash generative business with good income potential. But I don’t expect this year’s forecast yield of 7% to be maintained.

I’m backing this 7% yield

One high-yield stock that features prominently in my own portfolio is oil and gas services firm Petrofac Limited (LSE: PFC). Shares in the firm fell by more than 50% earlier this year, after it became the subject of a Serious Fraud Office investigation.

The outcome of this may not be known for some time. But the group’s operations appear to be continuing fairly normally. Although adjusted net profit fell by 4% to $158m during the first half of the year, the group signed new orders totalling $2.7bn during the period and has reported a number of big wins since then.

Consensus earnings forecasts for this year have been cut by around 15% since the SFO investigation was announced. The interim dividend has also been cut, and a revised dividend policy announced. Based on the firm’s first-half trading, I estimate that a full-year payout of about 28p per share may be likely. That would give a yield of 6.9%.

The market seems to be very cautious about the potential impact of the SFO investigation on Petrofac’s future earnings. The stock trades on a forecast P/E of only 5.5 for the current year.

In my view, this caution may be overdone, especially given the recent increase in the price of oil. I believe Petrofac could deliver a substantial re-rating at some point. I view the shares as a contrarian buy.

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Roland Head owns shares of Petrofac. The Motley Fool UK owns shares of Petrofac. 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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