As an income and value investor, stocks with very high dividend yields always attract my interest. But I don’t usually buy them, as quite often I find warning signs suggesting that a dividend cut might be likely.
Today I want to look at two stocks with 7% yields that I believe could be quite safe.
Better than expected
Shares in personal injury specialist NAHL Group (LSE: NAH) fell by nearly 4% today, despite the firm advising investors that its full-year underlying operating profit for 2017 should be in line with expectations.
In fairness, this stock has put on a spurt in recent months, having risen by 40% since September. I wouldn’t be surprised if some traders had decided to take profits after such a strong run.
For longer-term investors, this business still seems attractive to me. Unlike some rivals, debt levels are low and the group doesn’t have a lot of money tied up in unpaid bills. Cash generation is strong. Previous years’ dividends have generally been paid out of genuine surplus cash.
As such, the shares look cheap to me, with a 2018 forecast P/E of 9.5 and a prospective yield of 7.2%.
What’s the catch?
The main risk here seems to be that the legal regulations which govern NAHL’s business are changing. Management have already taken steps to restructure the business to work within the new rules, which are expected to come into force no earlier than April 2019.
However, it’s not yet clear how large the eventual impact on profits will be. Earnings are expected to have fallen by around 8% in 2017, and are forecast to drop a further 20% in 2018.
NAHL’s dividends are also falling to reflect this lower level of earnings. So although the stock is cheap, investors have to take a view on future earnings growth. Overall, I think this unusual stock is probably worth a closer look.
This Woodford pick looks cheap to me
Fund manager Neil Woodford’s focus on belief in the UK economy has led him to invest in a number of housebuilding stocks. One of these is Crest Nicholson Holdings (LSE: CRST), a FTSE 250 firm with a focus on the south of England.
The group’s shares currently trade on a relatively modest valuation compared to some rivals, with a forecast P/E of 7.3 and a prospective yield of 6.9%. This payout should be covered twice by earnings this year and looks entirely affordable to me in the current market.
The group’s balance sheet also seems healthy enough, with just £30m of net debt versus forecast profits of £167m.
What might go wrong?
The obvious risk is that the housing market could crash. However, low interest rates and government support through Help to Buy seem likely to delay this. I suspect a crash could still be some way off.
I also think that Crest’s focus on “the southern half of England” could help to make it more resilient in a downturn. Historically, the south has recovered more quickly from housing slumps than most other parts of the UK.
The group’s forward sales were up by 13.6% at the end of October, and total sales are expected to rise by about 13% to £1,205m this year. In my view, this 7% yielder could be a rewarding buy in 2018.
