5 yield stocks worth considering
These companies spanning the automotive and financial services sectors are tipped to deliver solid dividend yields over at least the next two years.
These companies spanning the automotive and financial services sectors are tipped to deliver solid dividend yields over at least the next two years.
There are various reasons why Australian share market investors love dividends – they aren't reliant on market movements; can provide a reliable source of income; and are less subject to volatility than capital growth returns.
Free cash flow and dividend yields are included in the many company performance metrics Morningstar analysts consider in their regular reports and fair value estimates. These can be tracked by Morningstar Premium subscribers using the Share Screener tool, which we've used to identify the following companies.
According to Morningstar analysts, Automotive Holdings Group (ASX: AHG) should deliver an average dividend yield of more than 7.5 per cent up to 2020. AHG operates an automotive retail network that sells passenger cars and commercial trucks. Morningstar equity analyst Daniel Ragonese anticipates its core automotive division will increase earnings by about 5 per cent annually over the next five years.
AHG is tipped to deliver an average dividend yield of more than 7.5 per cent up to 2020
"We believe Automotive Holdings Group warrants a narrow economic moat with a stable moat trend, which is entirely due to the size and strength of the automotive division," says Ragonese.
He expects mid single-digit top-line growth over the next five years, driven by modest organic expansion, "augmented by the company's continuing participation in the Australian automotive retailing industry consolidation".
Fragmentation within the broader automotive industry should benefit AHG through enabling further "tuck-in" acquisitions, according to Ragonese. "These will furnish it with greater scale and allow management to better allocate and price its inventory," he says.
AHG was trading at $2.40 at the last close, a 28 per cent discount to Morningstar's $3.30 fair value estimate.
Banking on a positive outlook
While Australia's banks have been battered by negative findings from the financial services royal commission, Morningstar maintains a positive outlook on their underlying business models.
Wide-moat National Australia Bank (ASX: NAB) should provide an average dividend yield of about 7 per cent over the next two years, according to Morningstar banks analyst David Ellis.
Acknowledging the recent media coverage, he says "economic facts simply do not support the overwhelmingly negative view of the financial press and some economic commentators on the Australian economy, corporate Australia, and particularly the major banks".
"We cannot ignore the serious consequences and fallout expected from the Royal Commission, but fundamentally National Australia Bank, and major bank peers, remain in good shape and will continue to produce solid profit growth broadly in line with growth in the economy," Ellis says.
NAB's latest closing share price of $27.80 was 14 per cent below Morningstar's FVE.
Westpac Banking Corporation (ASX: WBC) also holds a wide moat and labours under the same negative sentiment as NAB, the other big four banks and AMP (ASX: AMP). But Ellis says his "net opinion and outlook remain strongly positive".
With a $29.25 share price at the last close, Westpac is trading at a 17 per cent discount to Morningstar's FVE.
A different financial services flavour
Taking a slightly different slant within the financial services theme, Pendal Group Limited (ASX: PDL) – recently rebranded from BT Investment Management – is a fund manager.
Morningstar analysis suggest it will deliver a dividend yield of about 6.2 per cent, averaged across the outlook for 2019 and 2020.
The narrow-moat company had a stronger-than-expected first half of 2018, according to John Likos, a Morningstar director, equity research. Pendal's lift was driven by strong market performance and favourable currency movements – which were partially offset by net outflows of funds.
"Our forecast adjustments to revenue and costs largely cancel each other out, resulting in no change to our fair value estimate and 4-star rating," Likos notes in a recent update.
Trading at $8.80 at last close, the stock is about 20 per cent below Morningstar's FVE.
Another Australian-based international equities manager, Platinum Asset Management (ASX: PTM), rounds out this list.
Like Pendal, it boasts an impressive long-term track record. It is tipped to deliver an average dividend yield of just under 6 per cent over the next two years.
With a four-star rating and narrow moat, its fair value estimate was downgraded earlier this year, after underperformance in the second-half resulted in funds under management falling short of Morningstar's expected $28 billion.
"But despite the weak second half, our positive long-term view of FUM growth remains in place," Likos says.
Platinum closed yesterday at $5.49 and is trading about 15 per cent below Morningstar's FVE of $6.40.
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Glenn Freeman is senior editor, Morningstar Australia.
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