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One 10%+ dividend yield I’d buy right now

Income investors with experience know well there’s a very fine line between a dividend that is attractively high and a dividend that is dangerously high and indicates rocky times ahead. Because, of course, while a high yield can indicate a healthy business returning lots of cash, it can also mean investors are incredibly bearish on the company, often for very valid reasons.

Concentrating on cash

And a 10% dividend yield unsurprisingly sits smack dab on this very fine line. But the double-digit yield offered by discount retailer Shoe Zone (LSE: SHOE) is one that I reckon dividend-hunters should be very interested in.

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This is because the company is relatively healthy and has simply chosen to return wads of cash to investors and re-invest in its core stores rather than growing its estate to an unnecessarily large number. We can see this in action in the company’s reports for the past two years.

 

2015

2016

Pre-tax profits (£m)

10.1

10.3

Earnings per share (p)

16.2

16.9

Total dividends per share (p)

15.7

18.1

Net cash at year-end (£m)

14.2

15

Now, keen-eyed readers will notice total dividends paid out in 2016 were in excess of earnings, which is normally a huge red flag. But in this case there is little need to fret as this was due to an 8p special dividend, up from 6.1p in 2015, that represents the company’s policy of returning any cash in excess of £11m at year-end to shareholders.

With cash generated from operations increasing by £2.3m to £13.9m and little need for big investments in stores I believe this special dividend will be quite reliable in the coming years. And although the retail landscape is challenging, Shoe Zone’s discount prices have made it very resilient. Coupled with a cheap 10.6 forward PE ratio and a management team that has a big stake in the business and continues to raise margins, profits and dividends I believe this is one 10% yield that is worth a second look.

Rebuilding the brand

Another small-cap retailer with a large and growing dividend is menswear chain Moss Bros (LSE: MOSB), whose shares currently yield 5.8%. While the chain still has a reputation as a cheap place for suits for hire the current management team has spent several years rebuilding its brand, improving the shopping experience for consumers and focusing on sustainable, profitable growth.

As we see in the following table, this policy is beginning to bear fruit for the company and investors alike.

 

2015

2016

Pre-tax profits (£m)

5.9

7.1

Earnings per share (p)

4.71

5.51

Total dividends per share (p)

5.55

5.89

Net cash at year-end (£m)

17.3

19.5

Once again dividend payments were larger than earnings but this isn’t a huge worry. For one, the company continues to generate more than enough cash to cover these payouts. Last year cash from operations increased from £11.6m to £15.9m, which was more than sufficient to cover both the £5.6m paid in dividends and £8.5m invested in refurbishing existing stores and opening new ones.

Shares of Moss Bros aren’t exactly cheap at 18 times forward earnings but with a revamped brand generating impressive growth in sales, profits and dividends I reckon the stock is still an attractive one at this price point.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.