Should you buy 6% yielders Petrofac Limited, SSE plc and Direct Line Insurance Group plc?

Royston Wild discusses the investment appeal of big yielders Petrofac Limited (LON: PFC), SSE plc (LON: SSE) and Direct Line Insurance Group plc (LON: DLG).

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Today I’m running the rule over three of the Footsie’s biggest yielders.

Dicey driller

Investor appetite for oil services provider Petrofac (LSE: PFC) has dived in recent weeks as fears over black gold market’s supply imbalance have escalated.

Indeed, the engineer’s stock was recently dealing at levels not seen since early February, around 750p per share. And I believe stock pickers are quite right to be concerned as the murky market outlook forces huge budgetary cutbacks on small and large producers alike.

Despite seeing earnings tank during the past few years, Petrofac has managed to keep the wolf from the door thanks to its solid cash-generative qualities and the firm is keeping the dividend locked at 65.8 US cents per share.

And a solid return to earnings growth this year is expected to push the dividend to 68.6 cents in 2016, or so says the City.

But I’m not convinced of an imminent bottom-line bounce, and believe that capital expenditure reductions across the oil industry are far from finished. And with Petrofac boasting dividend coverage of 1.8 times, and net debt clocking in at $686m as of December, I reckon the engineer’s 6.3% yield is built on shaky foundations.

Power pup?

With independent power providers stepping up their fight against the established ‘Big Six’ operators, I reckon SSE (LSE: SSE) is a risk too far for those seeking cast-iron dividend growth.

The City doesn’t share my fears, however, and expects the utilities play to fork out a 90.5p per share dividend in the period to March 2017. This figure yields an impressive 5.9%, and is up from 89.4p last year.

The UK is now home to 40 energy suppliers compared with around a dozen just five years ago, with Britons becoming more and more accustomed to switching tariffs. This has played havoc with the likes of SSE’s customer base, and new Competition and Markets Authority (CMA) directives that makes it easier for households to switch provider are likely to exacerbate the problem.

Like Petrofac, SSE’s dividend cover falls below the safety benchmark of 2 times, at 1.3 times. And with huge operational costs also battering the bottom line, I reckon current payout projections at SSE could disappoint.

Line your pockets

I’m far more bullish concerning the payout prospects of insurance leviathan Direct Line (LSE: DLG), however.

The company saw gross written premiums rise 4.2% during January-March, it advised last month, powered once again by strength at its core Motor division. Written premiums here surged 10.5% year-on-year, to £360.7m, with in-force policies rising 1.7% thanks to Direct Line’s strong customer retention rates.

With massive product and marketing investment also bolstering demand for its home insurance products, the City expects Direct Line’s growth story to keep rolling in 2016, resulting in a full-year dividend of 22.6p per share. This yields a splendid 6%.

Sure, dividend coverage may also fall short of the conventional safety mark, at 1.3 times. But I reckon Direct Line’s splendid growth outlook and robust balance sheet should soothe investor nerves.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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