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Should you be tempted by these 2 high-yield shares?

There are few income stocks out there that have reported dividend growth like Telecom Plus (LSE: TEP). Over the past six years the company’s earnings per share have expanded by 40%, and over the same period, management has hiked the dividend payout by 61%, or around 8% per annum. 

Thanks to the company’s steady earnings and dividend growth, over the past five years the shares have produced an annual total return of 9.5% for investors. Over the past 10 years, the shares have generated a total return of 26% per annum. 

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And it looks as if the company’s dividend growth is set to continue following the release of first-half figures today. 

Dividend growth

After a robust first half, Telecom Plus management now believes that annual adjusted profit before tax should come in “slightly ahead” of expectations for the full year. Adjusted pre-tax profit from continuing operations rose 6% to £25.7m, while reported pre-tax profit rose 7% to £19.1m. 

Customer numbers have continued to grow organically, with 5,265 customers added in the first half to push the total up to 613,067. The company has benefitted from its diversified offering and impact of customers taking up more services

On the back of these figures, the dividend for the half was raised 4.3% to 24p from 23p. 

City analysts are expecting the company’s organic growth to continue for the next few years, with earnings per share growth of 5% predicted for this year, and 10% for 2018. I believe that this earnings rise should underpin further dividend increases, indicating that not only does the company’s current 4.1% dividend yield look attractive in the present environment, but it also looks sustainable and set to rise in the years ahead. 

Recovery play 

Telecom Plus’s impressive total shareholder returns cannot be matched by peer TalkTalk (LSE: TALK). Following a hack attack that affected 157,000 customers last year, shares in TalkTalk have underperformed the FTSE 100 by 17% as management has struggled to rebuild customer and investor trust. 

Hefty restructuring charges have held back the firm’s recovery, pushing it to report a £75m pre-tax loss for the six months to September 30, compared with a £30m profit a year earlier. A £31m charge for overhauling its mobile business, coupled with £59m of exceptional charges for restructuring helped push the business from a profit to a loss.  

To help rebuild the balance sheet, TalkTalk’s management has also slashed the dividend payout. The group is paying a half-year dividend of 2.5p a share, compared with 5.3p this time last year. Nonetheless, I believe that this is a sensible strategy, which should ensure that the payout remains manageable for the foreseeable future.

You see, historically the company’s dividend payout per share has exceeded earnings per share, which is generally interpreted as a sign that the payout is unsustainable. Now however, analysts believe the payout will be covered 1.1 times by earnings per share next year. 

These numbers give me confidence that the current dividend, equal to a yield of 4.9%, is here to stay. 

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Rupert Hargreaves owns no share 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.