Dividend shares offering a 10% yield can supercharge your portfolio, growing your investments much faster than lower-yield stocks over time.
The key to greater wealth is making the right choice of dividend share that’s able to sustain bumper tax-free payouts to your Stocks and Shares ISA year after year. Slowing global growth and Brexit uncertainty have hit company profits, so free cash flow that can be handed back to shareholders in dividends is rarer than ever. And bumper dividends funded by debt are not good news.
UK dividends disappear
Investors need to know if high dividends are too good to last. Vodafone broke the dam and reversed a 20-year trend in May 2019 to prune its dividend by 40%. In June Centrica tore up its books seeking £1bn in savings by 2022 and a 60% full-year dividend cut followed.
Just weeks after crashing out of the FTSE 100, Marks and Spencer saw profits dive 17%, clipping its interim dividend from 6.5p to 3.9p per share. Even the once-great Imperial Brands dumped its 10% a year dividend growth strategy in July as profits waned. City analysts think the tobacco giant’s 11.7% dividend must be reduced to secure its future.
Shares in UK housebuilder Persimmon (LSE:PSN) come with a hefty 10% yield that thrashes the rest of the FTSE 100. Being debt-free is a major positive signal for income investors. And return on capital employed (ROCE), a favourite metric of rich money managers like Fundsmith’s Terry Smith, is high at 31%.
The shares offer good value based on potential future cash flows but there’s a catch. Help To Buy has brought more buyers onto the housing ladder but the program ends in 2022, which will hinder future growth. Dividend cover is extremely tight at 1.1 times earnings, an indication that there aren’t enough profits to sustain a double-digit dividend.
Results this month showed a 6% sales decline and earnings growth is forecast to decline next year so this stock isn’t at the top of my watchlist. That comes next.
The real winner
My preferred pick for a 10%+ yield isn’t a FTSE 100 giant. If you’re in the market for a fast-growing share that also offers bumper dividends, you’re in luck here.
The Bank of Georgia (LSE:BGEO) is FTSE 250-listed despite running its operations from Tblisi.
A tightening of the regulatory landscape in Georgia meant that from January, poorer households couldn’t be issued loans with repayments above 25% of their monthly income.
But strong retail lending continues to enlarge BGEO earnings.
Brilliant Q3 results this month showed operating profits and income up a whopping 30%. Its margins are also stunning. £214m revenue in 2014 translated to £95.6m in pre-tax profit. In 2018, those numbers were £303m for £112m profit. That means it’s generating enough internal cashflow to pay out consistently to shareholders.
Because the bank doesn’t report earnings in sterling, 10.3% dividends haven’t been artificially inflated by weakness in the pound.
Director dealings aren’t a perfect metric but can occasionally point you to a well-priced share. In November CEO Archil Gachechiladze snapped up 5,000 shares for £72,500, suggesting confidence that the price will climb.
ROCE continues to produce for the bank. Investing in mobile banking for its 2.4m customers led to “strong growth and profitability numbers,” Gachechiladze said, adding “the pace of positive change is accelerating and very encouraging“. I’d say BGEO is at least worth a look.
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Tom has no position in the 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.