Tired of record low bond yields? Try these secret income stars
With yields on government bonds plumbing record lows and the FTSE 100's average dividend yield stubbornly flat at around 3.6%, income investors need to be creative in where they look for yield these days. One option is £50m market cap minnow Air Partner (LSE: AIR). It provides broker services for companies seeking to charter commercial aircraft and for individuals looking for private jets, as well as consultancy services to the aviation sector.
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This asset-light business model that doesn't require Air Partner to own or operate any aircraft allows it to return considerable cash to shareholders, which is why the shares now yield a very attractive 4.9%. Earnings only covered dividends 1.22 times last year but this should improve in the coming years as new acquisitions begin contributing fully and margins improve.
Air Partner's earnings have been steadily rising as it diversifies out from its core booking services into the aforementioned consulting and re-marketing business. The company has a very healthy balance sheet with £5.2m of net cash at the end of June. This gives it substantial firepower to continue its policy of small bolt-on acquisitions that cement its market leadership in niche markets and provide further cross-selling opportunities to existing customers.
This plan is very attractive and reminds me quite a bit of James Fisher and Sons, which has successfully executed this strategy in the marine services sector. Investing in such a small company that operates on the edges of a highly cyclical industry isn't for the faint of heart. But a dividend yield nearing 5%, rising earnings and an ambitious yet sustainably executed growth strategy definitely make Air Partner one to watch.
Closer look?
Motor insurer Esure (LSE: ESUR) may seem an unlikely income-seeker's dream as the company slashed its interim dividend from 4.2p to 3p back in August. But rather than a red flag, I think this dividend cut was not only a good idea, but also a decision that income investors should be cheering.
Why? Because it wasn't falling earnings or debt worries that caused management to lower payouts, but rather the belief that the cash would be better used invested back into growing the business. This was an audacious decision considering investors' attachment to dividends, but one I found laudable. Indeed, Q3 results show this plan is already working wonders. In the first nine months of the year, Esure saw motor insurance premiums rise 18.3% year-on-year and the number of its policies in force increase 7.6%. Together with solid growth in the smaller home insurance segment, this sets up Esure for years of continued earnings growth, which will filter down into increased dividends.
In the short term, income investors won't be too disappointed, as even after August's dividend cut the shares still yield a very healthy 4.19%. With the balance sheet and dividend cover looking quite healthy following the de-merger of Gocompare in November, as well as rising earnings, I reckon Esure is well worth a closer look for yield-hungry investors.
As impressive as Esure's dividend growth is, it doesn't hold a candle to the explosive 400% rise in dividend payouts over just the past four years from the Motley Fool's Top Income Share.
This fast-rising dividend is still covered over three times by earnings, which leaves plenty of room for future growth.
To discover why the Fool's analysts are so bullish on this stock, simply follow this link for your free, no obligation copy of the report.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
