Should you buy shares offering unusually high dividend yields? Payouts of 6% or more aren’t always sustainable and can be a warning sign that a cut is likely.
However, not all high yields are bad. Sometimes the market provides bargain buying opportunities, giving us the chance to lock in high rates of income for the future.
Today I’m going to look at two high-yield stocks I’d consider as income picks.
I’ll drink to that
The latest sales figures from pub operator Greene King (LSE: GNK) suggest to me that the UK economy remains in decent health. Like-for-like sales rose by 3.2% in the group’s pubs over the 36 weeks to 6 January.
During the two-week period covering Christmas and New Year, like-for-like sales rose by a stunning 10.9%. This suggests to me that the group may have taken market share from other operators during the period.
I turned positive on Greene King back in October, but I didn’t manage to add the stock to my portfolio at the time. I’m regretting this now, as the shares have already gained 17% since then.
I’m still tempted to buy, however. Cash generation is improving, reducing the chances of a dividend cut. At about 575p, the shares are trading on around nine times 2019 forecast earnings, with a 6% dividend yield. That looks like good buy to me.
This 9% yielder looks interesting
FTSE 100 asset manager Standard Life Aberdeen (LSE: SLA) offers a pretty extreme 9.5% dividend yield. At this level, there has to be some risk of a dividend cut.
The numbers make it clear why this might be — forecast earnings of 23.5p per share for 2018 are not enough to cover the expected dividend of 24.3p per share. Forecasts for 2019 tell a similar story — so is this a dividend trap to avoid?
I’m not so sure. I’ve added Standard Life Aberdeen to my own watch list because I think the shares could offer real value at current levels. I also believe the dividend might be sustainable. Let me explain.
£1.75bn return could secure dividend
It’s less than two years since Standard Life merged with Aberdeen Asset Management. The process of changed triggered by this mega-deal is still ongoing. As part of the merger, Standard Life’s insurance operations were sold to FTSE 250 firm Phoenix Group.
This deal included a cash payment of £2.3bn, of which £1.75bn is being returned to shareholders. This will include £750m of share buybacks, which will increase earnings per share and reduce the number of shares on which a dividend must be paid.
I suspect that the combination of these two factors will make the dividend more affordable. At this stage, I don’t expect a dividend cut.
Buy, sell or hold?
What concerns me more are the continued outflows from the group’s funds. Some customer withdrawals were expected when the two groups combined. But these rose from £12.4bn to £16.6bn during the first half of 2018, reducing the group’s assets under management from £626.5m to £610.1m.
Asset management is the main focus of the combined group’s business. So progress in this area is needed. However, at current levels I think a fair amount of bad news is already priced into the shares.
As I explained earlier, I think the 9.5% dividend yield could be sustainable. So at this level, I’d rate Standard Life Aberdeen as a turnaround buy.
