Shares with a dividend yield of 6% are often worth a closer look. A yield this high can be a sign that a company is out of favour, or is unlikely to deliver much in the way of growth.
The three stocks I’ve highlighted in this article all offer a prospective yield of about 6%. There are some big differences between them, but I reckon all three have potential as serious income buys.
Royal Dutch Shell
Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US) made headlines recently when it announced a £47bn offer for oil and gas producer BG Group.
The move is seen by some as a gamble that oil and gas prices will rise, and investors haven’t reacted very favourably. Shell’s share price has fallen by 11% since the offer was announced on 8 April.
This sell-off has left Shell shares trading below 2,000p for the first time since 2011. I don’t share the markets hostility to the BG deal, which I reckon is a smart way for Shell to acquire BG’s large, high quality oil and gas reserves.
Shell shares now trade on a forecast P/E of 13.5 with a prospective yield of 6.4%. The company’s balance sheet remains extremely strong, with cash of $19bn and net debt of just $24bn.
Shell’s determination to sell non-core assets and control investment should mean that profits remain stable at lower oil and gas prices.
At under 2,000p, I believe Shell shares are a very attractive income buy.
Australian mining giant BHP Billiton (LSE: BLT) (NYSE: BBL.US) has taken the opposite approach to Shell, choosing to shrink itself by demerging its non-core assets into a new company, South 32.
Although BHP has promised not to cut its dividend as a result of the demerger, the firm’s shares have fallen since the spin-off became effective. As a result, BHP shares currently offer a prospective yield of 6.0%.
BHP has a long history of progressive dividend growth, but there are risks, here. Weak commodity prices mean that earnings per share are expected to fall to $1.45 this year, giving a forecast P/E of 14.5 and dividend cover of just 1.1.
However, like Shell, BHP has a very strong balance sheet. I believe the miner’s dividend will be maintained, unless conditions in the oil and iron ore markets get unexpectedly worse.
Insurance companies are often great income stocks, as long as you can handle the occasional cut during years when claims are high. Like several of its peers, management at Direct Line Insurance Group (LSE: DLG) have chosen to return surplus cash to shareholders by paying regular special dividends.
Last year, the group paid a total dividend of 27.2p, giving a historic yield of 8.2%. This year, analysts are forecasting a total payout of 36p, giving a massive potential yield of 10.9%!
There’s no guarantee this will continue. The latest consensus forecasts for 2016 suggest that Direct Line’s payout could fall to 19.6p per share next year, giving a yield of 5.9%.
However, that’s still pretty attractive, in my view, and highlights the firm’s ability to generate cash and return it to shareholders.
Direct Line’s valuation is also fairly modest when compared to its earnings. The insurer’s shares currently trade on just 12 times forecast 2015.
Direct Line may be worth a closer look, but before you buy any dividend stock I'd urge you to test your choice against the 5 golden dividend rules in "How To Create Dividends For Life".
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Roland Head owns shares of Royal Dutch Shell, BHP Billiton and South32. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.