The Motley Fool

Are these 9% yields too dangerous… or too good to ignore?

  1. High yields typically arise when a company’s share price has fallen a long way but the dividend has not been cut. However, the market believes it will be cut — and the higher the yield, the stronger the market’s belief.

The market’s often right but now and again it gets it wrong. Today, I’m looking at two companies sporting yields in excess of 9%. Are these yields dangerous … or too good to ignore?

Expectations

Shares of low-maintenance building products manufacturer Epwin (LSE: EPWN) are down less than 3% as I’m writing, despite the company saying in its first-half results this morning that it expects the full-year performance to be “slightly below current market expectations.”

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Furthermore, it said it also now expects the performance for 2018 to be “lower than the market expectation for the current financial year.” The analyst consensus ahead of today’s results had been for a return to modest growth in 2018. So why has the market not trashed the share price?

Trading

Epwin had already notified the market of the potential loss of two customers (10% of revenue) for reasons entirely out of the company’s hands. So, that was largely priced-in.

On the wider front, it said that trading conditions in its key repair, maintenance and improvement area “remain subdued” but that management is “confident of the long-term growth drivers” in the market. It also said that the newbuild market “continues to be strong” and that there are “indications of improved demand” in social housing. Meanwhile, it’s already begun adjusting its cost base, which should mitigate some of the pressure on margins from higher input costs due to the weakness of sterling.

An attractive dividend?

The board upped the interim dividend by 1.4% today, making the trailing payout 6.63p and giving a running yield of 9.5% at a current share price of 70p. It said: “We are confident in continuing our record of strong cash generation and our ability to offer an attractive dividend to shareholders.”

I note that even if 2018 earnings came in 50% lower than the analyst consensus ahead of today’s results, the dividend would still be covered. I see this £100m AIM stock as one with recovery potential that might manage to maintain its dividend in the absence of a serious deterioration in trading. As such, I rate it a higher-risk buy.

Another attractive dividend?

Specialist distributor Connect (LSE: CNCT) is another company seeing mixed trading conditions across its businesses in “more challenging market conditions.” The recent sale of its Education & Care business looks a good move, as it will enable the group to focus on opportunities and synergies in its News & Media, Parcel Freight and Books divisions.

In its half-year results in April, the board increased the interim dividend by 3.3%, making the trailing payout 9.6p and giving a running yield of 9.3% at a current share price of 103.5p. Management said the uplift in the interim dividend “reflects confidence in the ongoing strength of the group.”

I see this £256m FTSE SmallCap stock as another with recovery potential that could provide the bonus of a maintained dividend. So, as with Epwin, I rate Connect as a higher-risk buy.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

G A Chester has no position in any of the 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.