With inflation now significantly higher than it was a year ago, many investors may be searching for companies with high dividend yields. In some cases, they have become increasingly popular, and their yields have compressed to some extent. However, in other cases they have declined in value this year. This could create an even more enticing buying opportunity for the long run. Here are two shares which appear to fit that description.
Encouraging update
Updating the market on Friday was telecoms specialist, KCOM (LSE: KCOM). The business has made an encouraging start to its current financial year, with it trading in line with expectations. Its fibre deployment in Hull and East Yorkshire is on schedule to reach 150,000 premises. This represents around two-thirds of its addressable market and should be completed by December 2017, with customer take-up continuing to be high.
The company’s overall strategy to deliver a fibre rollout, focus on higher-margin/capital-light operations, and launch ‘over the top’ services that focus on building average revenue per user is progressing well. However, the transition away from commoditised services is expected to result in a fall in revenue and margins associated with the company’s legacy activities. This could be a reason why the company’s share price has declined by 3% since the start of the year.
With a dividend yield of 6.5%, KCOM appears to be an attractive income play at the present time. Although shareholder payouts are expected to be higher that earnings this year, the company’s potential to deliver improving financial performance under its new strategy means that its prospects as an income stock remain high.
Difficult outlook
Also proving unpopular among investors in 2017 have been shares in Stagecoach (LSE: SGC). The transport company has recorded a decline in its valuation of 16% since the start of the year. This has pushed its dividend yield higher so that it now has an income return of 6.5%. This is 2.5 times greater than the current rate of inflation.
As well as beating inflation in terms of its yield, Stagecoach also has the potential to deliver dividend growth which exceeds the rate of inflation in future. It has a dividend coverage ratio of 1.8 at the present time, which suggests that it could raise dividends at a brisk pace without hurting its overall financial standing.
Of course, Stagecoach faces a difficult outlook. Its bottom line is expected to fall by 14% this year and by a further 10% next year. This is due to subdued trends in its bus division and difficulties regarding its East Coast operations. While disappointing, the company remains upbeat about its long-term outlook. And with it trading on a price-to-earnings (P/E) ratio of just 8.6, it seems to have a sufficiently wide margin of safety to merit investment at the present time.
