As miners continue to recover from the recent commodity crash, oil explorers lick their wounds and repair their balance sheets and the major UK indices hover near all-time highs, it’s becoming increasingly difficult for income investors to find the bumper dividend yields that the LSE used to reliably provide. But that doesn’t mean there are no huge yielders left, as the 6%+ yields offered by Capital & Regional (LSE: CAL) and Redde (LSE: REDD) illustrate. But should income investors rush to buy both these options or is caution warranted?
A capital idea?
Well, despite all the talk of weakening consumer confidence and slowing retail sales, mall owning REIT Capital & Regional continues to perform well so far. In the half year to June the company’s adjusted profits rose 6.6% year-on-year (y/y) to £14.5m, thanks to like-for-like rental income rising 0.5%, increased revenue from its centres’ car parks, and cost-cutting designed to cut the bloat from central office functions.
Together these boosted adjusted earnings per share from 1.94p to 2.06p y/y and allowed the interim dividend to increase to 1.73p. This puts the company on track to meet or exceed analysts’ forecasts for a full-year payout of 3.66p that would yield around 6.3% at today’s stock price.
However, I see a few reasons to be cautious about investing in Capital & Regional at this time. The main reason is simply the fact that macroeconomic headwinds including inflation and stagnant wage growth are building and threaten all companies reliant on healthy retail spending. We’re already seeing the effects of this in the company’s H1 results as footfall to its centres fell 0.9% y/y.
To be fair, this was better than the sector average thanks to the majority of its centres catering to more value-focused stores, but lower footfall will eventually lead to falling rents, property values and profits for the company. Furthermore, it is relatively highly leveraged even for a REIT. At the end of June the group’s loan to value ratio was 49%, compared to 22.2% for Land Securities and 29.9% for British Land. With above-average debt levels and sector-wide headwinds mounting I’ll be steering clear of Capital & Regional despite the very nice dividend yield.
Ready-made income potential
I’m much more interested in the 6.7% trailing yield offered by Neil Woodford-backed motor accident solutions provider Redde. The company’s business model is to serve as the outsourcer of choice for motor insurers by providing claims processing, appropriate legal services and securing temporary rental cars.
The business has been growing sales at a steady clip in recent years by bringing in new insurance customers, cross-selling and up-selling its variety of services and acquiring related companies. In addition to growing sales, the company has few fixed assets and little need for major capital investments so it’s fairly profitable and can direct the bulk all of its profits to shareholders via dividends.
In the company’s latest results, which cover the six months to December, net cash generated from operations rose to £22.3m and management paid out £14.9m of this in dividends. With net debt of just £13.5m at period end, big dividend payouts and an attractive valuation of 14.3 times forward earnings, I reckon income investors would be well served by taking a closer look at Redde.
But if Redde is still a bit too pricey for your taste, I recommend checking out the Motley Fool’s Top Small Cap of 2017, which trades at just eight times earnings. This bargain basement valuation doesn’t mean low growth though as the company has increased earnings by double-digits four years running.
To discover this value and growth investor favourite for yourself, simply follow this link for your free, no obligation copy of the report.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended British Land Co. 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.