2 stocks I'd buy with dividends yielding 6%
As investors, we all love high-yielding stocks as they often provide the best returns. But does that mean we should simply go out and add these stocks to our portfolios?
It's your lucky day
Not necessarily. When trawling through a list of companies whose shareholder payouts are high enough to satisfy our craving for juicy dividends, we should also remember to check that they're affordable and sustainable over the longer term. In other words, we need to ensure there is adequate dividend cover.
But don't worry. Today, I've done all the hard work for you, and found not one, but two, London-listed companies that not only offer very generous and affordable shareholder payouts, but also happen to be trading on attractive valuations at the present time. This must be your lucky day.
As one of the UK's leading housebuilders, Galliford Try(LSE: GFRD) last year enjoyed revenues of around £2.8bn, operating three businesses comprising Linden Homes, Galliford Try Partnerships, and Construction & Investments.
All three businesses delivered strong underlying performances during the last financial year, but Linden Homes and Partnerships & Regeneration were the standout performers achieving excellent revenue and margin growth.
However, one-off costs relating to legacy contracts in the construction business impacted the group's overall financial performance, resulting in a 57% slump in pre-tax profits. Bad news, right?
Well, stripping out these exceptional charges, Galliford delivered a 9% increase in pre-tax profits to £147.6m, with revenues (including joint ventures) climbing 6% to £2.8bn. This strong underlying performance gave management the confidence to propose a full-year dividend increase of 17% to 96p per share.
Despite the strong results, the group remains cautious about the impact of the current political uncertainty and the medium-term outlook for the macro economy. But I reckon the continued strong demand in housebuilding, stable construction markets, a healthy order book of £5.3bn, and a strengthened balance sheet should all help provide solid foundations to deliver further growth in the years ahead.
At around 1,340p Galliford's shares are trading well below their peak of 1,813p reached in 2015, and come with a bargain basement valuation at below eight times forward earnings for FY2018. Meanwhile, dividend payments continue to rise year-on-year, with the shares now offering a huge 7% yield, with payouts easily covered by forecast earnings.
But Galliford isn't the only residential property developer offering high levels of income at a knock-down price at the moment. FTSE 250 peer Crest Nicholson(LSE: CRST) has also recently seen its shares pull back from all-time highs, and I sense a great buying opportunity for those seeking higher levels of income at a very attractive price.
The Surrey-based housebuilder completes its financial year at the end of this month, and although final results aren't due until January, the business looks set to achieve a landmark £1bn in reported revenues for the first time in its 54-year history.
Crest Nicholson offers up a near 6% yield covered almost twice by forecast earnings, and trades on a ridiculously cheap forward earnings multiple of just 8.7. I can see shareholders enjoying further lucrative returns in the years ahead.
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Bilaal Mohamed 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.