One 8%+ yielding growth stock I’m adding to my watchlist

Separated from Old Mutual only three months ago, wealth management giant Quilter (LSE: QLT) is already richly rewarding investors with a special interim dividend of 12p per share. At today’s share price it represents a whopping 8.8% dividend yield.

Now, this was indeed a ‘special’ dividend representing part of the proceeds from the management buyout of another part of the business, but I do see good potential for the underlying business to continue paying more down-to-earth, but still impressive, dividends.

A big part of this is the high-margin, highly-scalable nature of the wealth management business. In the first half of this year, the business generated revenue of £385m and kicked off £110m in underlying operating profits as margins bumped up to 29%.

In these same six months, the company attracted £2.2bn in net client fund inflows, which together with investment returns, took its assets under management up to £116.5bn. The fund management industry is a competitive one but with equity markets buoyant, trillions in potential inflows to target, and its own management team now able to focus solely on growing the business, rather than being part of a larger parent company, I expect Quilter has plenty of space to continue expanding.

And thanks to the inherent operational leverage in its business model, there’s also good scope for further improvements to margins. This would mean higher earnings, and thanks to the business’s low capital investment needs, much of these can be returned to shareholders.

In H1 the company’s 5.5p underlying earnings per share, which exclude the aforementioned disposal, increased 25% to 5.5p. For the full year, analysts are estimating EPS of 10.75p rising to 11.5p in 2019 with a dividend payment that year of around 5p.

At today’s share price that would mean a yield of 3.8%. Certainly not the 8.8% yield being generated this year, but to my eyes a very sustainable payout from a company worth following given its prospects for revenue and profit growth.

A picks and shovels option

Another player in the wealth management space that appeals to me is fund services provider JTC (LSE: JTC). Rather than managing money for clients like Quilter, it provides administration services for money managers ranging from private equity groups to ultra-high-net-worth individuals. The company has been public for only a few months, but thanks to increasing regulation, geographic expansion and acquisitions that have broadened the array of services it offers, it has a compelling track record with compound annual revenue growth of 23% over the decade to 2017.

Judging by the company’s interim results released this morning, this growth is far from done. Revenue during the six months to June rose 25.2% to £35.3m thanks to organic growth of 8% and two acquisitions completed last year. The integration of acquisitions and a focus on cost controls led EBITDA margins up from 23.6% to 29.9% during the period as well, meaning the business generated £10.5m in underlying EBITDA.

With an uptick in the value of its potential bidding pipeline and another acquisition completed following the end of June, this growth looks set to continue into H2 as well. At 24 times consensus forward earnings, JTC’s shares are not cheap. But with a strong record of growth, high levels of recurring revenue and less cyclicality than fund managers, I think this business is one to watch closely.

Looking to income stocks like Quilter to quit the rat race and retire early?

Of course you are, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Ian Pierce has no position in any of 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.