The Motley Fool

Income investors: 2 stocks with sustainable 4%+ dividend yields

CC0 Public Domain

If you’re looking for the best sustainable dividend investments, I think it’s important to look beyond the well-covered FTSE 100 names to find stocks that are available at attractive valuations.

Strong cash generation

Chesnara (LSE: CSN), the life insurance and pensions consolidator is a great example of small-cap stock with a dependable dividend policy.

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...

Owing to economic tailwinds and the successful completion of the acquisition of Legal & General Nederland, Chesnara’s reported group cash generation in 2017 soared to £86.7m, up from £34.3m in the previous year. Pre-tax profit more than doubled from £40.7m to £89.6m, after it partially benefitted from a £20.3m non-recurring gain from the takeover.

As a result, the board delivered another 3% increase in its full-year dividend to 20.07p per share, marking its 13th successive rise in annual dividends. At its current share price of 414p, Chesnara yields 4.8%.

Dividend safety

But the shares’ high yield is only part of the story — the safety of the yield is just as important. And in Chesnara’s case, the payout is very secure. With group cash generation covering its dividend payout by nearly 2.9 times (and profits covering the dividend by a similar ratio as well), the possibility of a dividend cut is extremely remote, while the likelihood of further dividend growth is high.

Sure, Chesnara can afford a higher dividend amount right now, but the board has made it clear that it is not currently considering it. Instead, the company is looking to save its firepower for future acquisitions.

Acquisitions enable the company to grow more quickly and often at a much lower cost to writing new business. On the downside however, the company’s future growth is dependent on its ability to continually find new attractively valued acquisition targets.

Attractive yield

Looking elsewhere, Rank Group (LSE: RNK) may not be a company that you may have come across, but I’m sure you have heard of some of its brand names. The company’s main operations are in the UK, where it owns Mecca Bingo, and Grosvenor Casinos, the UK’s largest casino operator.

Recent weak trading figures have sent shares in the company tumbling, but I still reckon its shares offer an attractive sustainable yield. At its current share price of 175p, Rank offers a 4.2% yield which is backed up by more than two times earnings cover. The balance sheet is also in a good position, with the company reporting a small net cash position of £4m at the end of its first half.

Certainly, its brick and mortar business is stagnating or shrinking, with recent figures pointing to a 2%-3% decline in its Mecca and Grosvenor Casino revenues. But this is a manageable decline and is partially offset by double-digit growth in its digital business, which continues to trade strongly. Moreover, one-off factors were partly to blame, with Grosvenor Casinos’ underperformance exacerbated by a negative contribution from its VIP players, while both UK venues were hit by unexpected cold weather this year.

Looking ahead, City analysts expect the dividend to continue grow, with forecasts of 8p this year and 8.6p in 2019. Adjusted earnings per share for 2017/18 are expected to be flat on last year, although growth of 5.5% is pencilled in for next year. This means its dividend cover ratio is expected to fall only modestly from 2.2 times last year, to a still resilient two times figure by 2018/19.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jack Tang has no position in any 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.