Two 7% monster yielders I’d consider buying for 2018

With yields more than double the market average, these two stocks look attractive to me.

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Shares in Kcom (LSE: KCOM) have struggled to gain traction over the past five years as the company’s earnings have stagnated. 

Indeed, since 2012 the company’s net profit has fallen from £38m to £25m for the last fiscal year. Over the same period, revenues have declined by 15%. However, as an income play, Kcom ticks all the boxes. 

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Right now, the shares support a dividend yield of 6.8%. while this distribution is not covered by earnings per share, on a cash flow basis for the past six years, the total dividend payout has been covered an average of twice by cash generated from operations. What’s more, the firm’s balance sheet is also strong. Net debt is currently less than 58% of fixed assets. 

Beating expectations 

According to a trading update published by the company today, management now expects the firm to beat City expectations for growth for the full year thanks to a multi-year rebate on its Hull and East Yorkshire network infrastructure. This reimbursement is expected to total £3m, which is substantial considering the City had been predicting a pre-tax profit figure of £29m for the fiscal year ending 31 March 2018. 

That being said, despite this rebate, shares in Kcom seem relatively expensive compared to the broader market and telecoms sector. The stock currently trades at a forward P/E of 19 and earnings per share are expected to shrink for the next two years as the firm continues to invest in its fibre network rollout. Growth is currently scheduled to return for the year ending 31 March 2020. 

So if you’re not worried about growth, and you’re looking for bond-like income in today’s low-interest rate world, Kcom seems to me to be an excellent buy for 2018. 

Cash cow 

Another top income stock I’d buy for 2018 is payment network operator Paypoint (LSE: PAY). This is my favourite kind of dividend stock, it’s a cash cow. The company’s asset light, high-profit-margin business means that the group was able to achieve a return on equity of over 90% for fiscal 2017. that’s a return most other companies can only dream of. Total cash generated for the year was just over £47m, which helped fund a £79m special dividend. £82m of cash on the balance sheet from a significant asset sale helped fund the remainder of the payout.

And going forward, City analysts are expecting Paypoint’s cash return strategy to continue. A payout of 83.2p per share is slated for the fiscal year ending 31 March, rising to 84p for the following fiscal period. These payouts translate into yields of 9.6% and 9.7% respectively. 

As well as the attractive level of income on offer. Paypoint’s shares trade at a relatively attractive forward P/E of 14.1, which is hardly expensive considering the group’s level of profitability and return on equity. 

All in all then, if you’re looking for a cash-rich company with a market-beating yield that’s returning most of its income to investors, I believe Paypoint could be the investment for you. 

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of PayPoint. 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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