Seeking high income? Why I’d skip the FTSE 100 for this 8%+ yielder

Why I’m bullish on this stock offering an 8.6% dividend yield, more than twice as high as the FTSE 100’s (INDEXFTSE: UKX).

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As of the end of June, the average dividend yield of the FTSE 100’s constituents stood at a very respectable 3.84%. Although this is a decent level of income, the index’s weighting towards highly cyclical sectors such as oil and gas (14.21% of the index), banks (10.59%) and miners (6.97%) leaves me with a bad taste in my mouth.

That’s why I’m much more interested in the more resilient earnings, and thus dividends, on offer from payments solutions provider PayPoint (LSE: PAY). It works with 50,000 retailers across the UK and Romania to provide point of sale solutions and associated services like ATMs, package pick-up and returns, and utility bill pay options that serve to increase footfall to stores.

As the market leader in this relatively asset-light business, PayPoint is highly profitable, last year earning £53.5m in operating profit from £119.6m in net revenue. With £18.5m of cash on hand and few capital investment needs, management is able to return plenty of cash to shareholders. Last year the company paid both an ordinary dividend of 45.9p and a special dividend of 36.6p that will be repeated over the next few years unless management spots an attractive acquisition opportunity.

This ordinary dividend alone represents a yield of 4.8%, but adding in the repeat special dividend bumps the actual yield up to a fantastic 8.6%. At 15 times earnings, the company’s stock isn’t the cheapest on the market. But with great income potential, substantial growth opportunities from expansion in Romania and its new PayPoint One terminal in the UK, and a proven highly cash generative business model, I’d much sooner buy and hold PayPoint than the FTSE 100.

Too many questions

Another mid-cap stock whose dividend yield far outpaces that of the UK’s biggest index is infrastructure support services provider Stobart Group (LSE: STOB). Stobart, which owns Southend airport and is also a major supplier of biomass fuel to power plants, paid out 18p in dividends last year that represent a current yield of 7.68%.

This is a high yield, but like PayPoint, Stobart is comfortably able to afford it with underlying earnings per share last year of 32.6p and a healthy balance sheet with just £36.6m in net debt. However, this does not mean I’ll be buying shares of the diversified group any time soon.  

First and foremost this is down to the bruising boardroom fight that is still playing out between the founder, former CEO and recently fired director, Andrew Tinkler, and the current Chairman Iain Ferguson stemming from a dispute over the company’s strategy and accusations of abuse of office. Ferguson was re-elected at the company’s AGM last week with a slim 51.2% of votes cast in his favour, but with Tinkler and his supporters vowing to fight on and both sides suing each other, this is one huge red flag.

On top of this, the group’s core operations remain fairly low-margin and for the next few years, its dividend will essentially be covered by disposals of non-core assets, such as last year’s realisation of a £123.9m holding in Eddie Stobart Logistics. Together, these two issues are enough for me to look towards safer harbour for my retirement investments. 

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.

Ian Pierce has no position in any of the shares 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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