It’s wise to treat big dividend yields with suspicion. Sizeable dividends can be unsustainable and therefore I often look at other metrics, including the dividend coverage ratio, to see whether the firm can sustain its payments.
However, Synthomer (LSE:SYNT) and Steppe Cement (LSE:STCM) are two dividend big-hitters that I’m backing for my portfolio. The two firms each have roughly 10% dividend yields. That’s substantially above the current level of inflation.
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Synthomer
At today’s price, Synthomer has a dividend yield of 9.6% and a healthy coverage ratio of 2.5. That’s a huge yield and it comes on the back of a stellar 2021. The firm, which makes products like latex gloves, surged during the pandemic as demand for its goods skyrocketed. Synthomer registered pre-tax profits of £283m in 2021, more than double any year before the pandemic.
However, the share price has now returned to pre-pandemic levels. As a result, Synthomer has a particularly low price-to-earnings ratio of 4.
Despite the falling price, the prospects look good for this supplier of aqueous polymers. In late April, Synthomer said it had made “an encouraging start to the year“, with all but one of its businesses ahead of or in line with Q1 2021 performance.
Synthomer has not changed it full-year outlook and the board remains confident that recent acquisitions will bear fruit. It said it has a “proven growth strategy” that will contribute to the business’s development in the coming years.
However, the acquisition and the appointment of a new CEO also mark a period of change for the group. This could be a period of pain for Synthomer, especially if demand for gloves and other products falls as Covid subsides.
I’ve bought Synthomer shares and would buy more.
Steppe Cement
At today’s price, Steppe Cement has a 10.3% dividend yield and a dividend coverage ratio around 1.8. Once again, this is one of the highest dividend yields for a UK-listed stock. Steppe’s dividend payment comes on the back of a strong year for the Kazakh cement maker. Revenue for the year ended 31 December came in at KZT36.02bn (£60.09m), which was 16% higher than the KZT30.96bn recorded in 2020.
The strong performance has continued into 2022. Steppe posted revenue of KZT6.3bn in the three months ended March 31, representing a sizeable jump from the same period in 2021.
The Kazakh property market is expected to cool in 2022 after coming close to overheating in 2021. But long-term trends look positive for the market and for Steppe. The Prime Minister’s office has forecast strong demand for housing due to the outdated nature of existing dwellings, as well as an increase in the birth rate in the past two decades.
The government also sees construction as an area to improve social wellbeing and provide jobs.
I’ve got Steppe Cement on my watchlist, but one issue is the spread between the buying and selling price. Currently I can buy for 35p, but sell for 33p. That’s a sizeable spread so I’m only watching for now.
