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