2 tempting shares with dividend yields of more than 5%

Moss Bros
Moss Bros

People often think you need to buy FTSE 100 blue-chip shares to secure bountiful dividends. But that's not true, and here are two smaller companies offering tasty yields.

Feel the width

Moss Bros Group(LSE: MOSB) is a lot more than just a place to hire fancy clobber for posh events these days. Refocusing in recent years and billing itself as the "first choice for men's tailoring," the company is aiming to produce a more attractive shopping experience at its stores. And in a move that would probably horrify some of its more traditional customers of yesteryear, it's also moving online.

For the year ended January 2017, e-commerce accounted for 11% of sales, with a 15.7% rise over the previous year. Coupled with a 5.3% rise in overall like-for-like sales, tighter cost controls and targeted discounting, that helped boost pre-tax profit by 20% and EPS by 17%.

The company lifted its dividend by 6% too, and that leads to my focus here -- Moss Bros's forecast yields of 5.4% for the current year, followed by 5.6% next, on a share price of 115p. But before you rush out and snap up the shares, you need to know those payouts won't be covered by forecast earnings. So what's the story?

Back in 2014, the company massively raised its dividend to an uncovered 5p per share (from 0.9p), announcing "a commitment to a significantly increased dividend" while pointing to its strong cash generation. That's stuck, with the 2017 report speaking of the debt-free nature of the business and its healthy cash balance, and saying: "It is our intention to continue this progressive dividend policy balanced against the wider investment needs of the business".

In the long term, earnings will eventually have to match and exceed the dividend for that policy to be sustainable, but in the medium term the payout looks safe to me -- and very attractive.

Huge dividend

The forecast 6% dividends from Moss Bros look almost paltry compared to the 7.9% and 8.1% yields expected from Connect Group(LSE: CNCT) over the next two years, following on from several years of inflation-beating progressive rises from the specialist distributor.

What's more, they'd be reasonably well covered by earnings at about 1.8 times, and we're looking at P/E ratings of only around eight. So why the low rating for the 124p shares?

The firm's net debt of £150m at February 2017 must be part of it, and with earnings per share actually forecast to fall by 12% this year (and recover by 5% in 2018) after remaining static for two years, I suspect there are fears that the growth tide for Connect might be ebbing. Coupled with the competitive nature of the business, I'm not really surprised that there's some obvious pessimism.

But I don't share it, and I reckon the company's diversity through its News & Media, Parcel Freight and Books divisions (with the lesser-performing Education & Care division slated for disposal) stand it in good stead for the longer-term future. After all, it does count the mighty Smiths News among its customers.

If trading should weaken, or debt and borrowing become too troublesome, it's possible the dividend could be cut. But with such a big yield on the cards and the shares on a low rating, and with no obvious threat to earnings in the medium term, I think there's enough of a safety margin to make Connect look attractive.

Growth with dividends

In the tough decision of whether to go for growth or dividends, what better than shares that can provide both? If you want to learn about a hot candidate, check out our Top Growth Share From The Motley Fool report.

The past five years have brought in double-digit annual earnings growth, and the City's experts are predicting two more years of solid rises on top of that. And there's a progressive dividend policy to add to the mix.

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Alan Oscroft 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.