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I’d hold these two 7% yielders for the next decade

Dividend stocks have the potential to transform your portfolio’s returns. Indeed, past research has shown that over the long term, dividends account for more than half of equity market returns, so ignoring dividend stocks could cost you thousands over the course of your career. 

The best dividend stocks have high-profit margins and strong balance sheets, which are precisely the traits that Galliford Try (LSE: GFRD) offers. 

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Cash cow

Over the past five years, Galliford has reaped the benefits from the UK housing boom. For the fiscal year ending 30 June 2018, City analysts are expecting the company to report earnings per share of 167p, up 135% from the 71p per share reported for fiscal 2013. 

As Galliford’s earnings have grown, so has the company’s dividend distribution to investors. Over the past five years, the firm’s dividend has expanded by 164%, and according to current City forecasts, next year the shares are set to support a dividend yield of 8.1% — this payout will be covered 1.5 times by earnings per share. 

For the financial year ending 30 June 2017, Galliford generated over £100m of cash from operations, which was more than enough to cover the firm’s total dividend payout of £73m. I believe that this will be the case for 2018 as well. And even if the firm’s earnings start to fall, the group’s balance sheet looks healthy with a net cash balance of £7.2m. 

Devoted to shareholder returns 

As well as Galliford, I believe that recruitment firm Gattaca (LSE: GATC) could be a great income buy for your portfolio. 

Shares in Gattaca currently support a dividend yield of 7.6% and trade at a forward P/E of 8.4. City analysts are expecting the firm to report earnings growth of 49% this year, so not only does the company look like a great yield play, but it also offers growth at a reasonable price. 

Gattaca’s balance sheet is weaker than that of Galliford with net debt at the end of fiscal 2017 (31 July) standing at £40m. However, the company is throwing off enough cash to maintain its dividend and keep debt under control. Over the past five years, the firm has generated on average £10.8m per annum from operations. Capital spending is minimal, so almost all of this cash is available for paying the dividend, which cost a total of £7.2m last year. 

To help grow earnings, Gattaca is trying to diversify overseas. This strategy has yet to pay dividends, but over the next few years, the group should start to see the results of its diversification strategy (although my Foolish colleague Royston Wild seems to disagree). International business still accounts for just 20% of group net fee income. As growth unfolds, it’s likely the company’s dividend payout will grow as well. 

So, if you’re looking for a high-single-digit dividend yield with room for further growth, Gattaca seems to me to tick all the income boxes. 

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Rupert Hargreaves does not own any 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.

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