Today, I’m hunting for high-yield stocks with the potential to provide a reliable dividend income.
My first choice is FTSE 100 banking giant HSBC Holdings (LSE: HSBA). Although the bank’s operations are global, around 75% of its profit comes from Asia. London forms the other end of a chain, linking western investors with Asian markets for more than 150 years.
In my view, Brexit risks are fairly minimal here. Unlike UK-focused banks such as Lloyds, HSBC’s profits don’t depend on the UK housing market (mortgages) or consumer spending (credit cards). Nor is the group heavily dependent on trading between the UK and the EU.
Trading results for the first nine months of 2018 highlighted strong conditions in Asian markets. Adjusted pre-tax profit of $18.3bn was 12% higher than for the same period last year. Most of this was driven by strong conditions in Asia, where pre-tax profit rose 13% to $13.8bn.
A good time to buy?
Although operating expenses also rose slightly, the group’s overall profitability has improved this year. Return on tangible equity rose to 10.1% during the first nine months of the year, compared to 9.3% for the same period last year.
For investors, I believe the stock looks affordable and fairly low-risk. HSBC shares trade at 664p at the time of writing, giving the bank a price/book ratio of 1.05, and a forecast price/earnings ratio of 11.6. An expected payout of $0.52 per share should provide a dividend yield of 6.1%.
As an income investor, I’d be happy to buy and hold HSBC at this level.
This small-cap boasts an 11% yield
My second stock is convenience store operator McColl’s Retail Group (LSE: MCLS). As I write, McColl’s share price is down by 28% to just 85p, giving the firm’s shares a forecast dividend yield of 11%.
The trigger for today’s fall was the group’s second profit warning in six months. Management said that last year’s failure of wholesaler Palmer & Harvey, and the subsequent switch to Morrisons as a primary wholesale supplier is continuing to cause “challenges.”
Unfortunately, this isn’t the retailer’s only problem. Tough competition from rivals means that the group has been forced to absorb rising costs, such as the National Living Wage. Weak sales growth means that like-for-like revenue fell by 1.4% over the 12 months to 25 November.
As a result of these pressures, McColl’s earnings, before interest, tax, depreciation and amortisation (EBTIDA), are now expected to fall by 20% to £35m this year.
Profits for the 2018/19 financial year are expected to be “no more than a modest improvement” on this year’s result.
Buy, sell or hold?
Although net debt has fallen by £142m to £100m over the last year, profits will be lower too. My sums suggest that the group’s net debt-EBITDA leverage ratio is now 2.9x. That’s well above the 2x maximum I prefer to see.
Another concern is that much of this debt reduction was only possible thanks to £25m of cash proceeds from sale and leaseback transactions. Selling freehold property in this way generates one-off cash gains, but leaves the group with rising long-term lease liabilities.
McColl’s has low profit margins and is struggling to grow. In my view, the firm’s debt levels are too high. I think a dividend cut will soon be needed. I view this as a stock to avoid.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings, Lloyds Banking Group, and McColl's Retail. 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.