Dividends of more than 6% are generally said to be high risk. But there are occasional exceptions. In today’s article I’ll take a look at three stocks offering yields of close to 10%.
NAHL Group
Shares in legal services firm NAHL Group (LSE: NAH) fell today, despite the company confirming a 19% dividend hike which gives NAHL stock a trailing yield of 9.9%!
The problem is that more than 90% of NAHL’s pre-tax profits last year came from personal injury claims, via its National Accident Helpline business. The Chancellor announced a review of the personal injury (PI) sector in his Autumn Statement last year, and NAHL believes “some regulatory change in PI is inevitable”. A crackdown on whiplash compensation and other controversial claims is expected.
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NAHL warned today that lower demand for personal injury claims will lead to reduced profits in 2016. Despite this, the group said today that it’s confident of delivering earnings growth in 2016, albeit “marginally below expectations”.
The shares currently trade on a trailing P/E of just 7.4. If NAHL can maintain earnings growth, then this could prove to be a bargain. But uncertainty about future regulatory changes makes this a risky bet, in my opinion.
Vedanta Resources
Indian mining group Vedanta Resources (LSE: VED) is expected to pay a dividend of $0.36 this year, giving a forecast dividend yield of 7.6%. Although this is 44% less than last year’s payout, Vedanta remains one of the highest-yield stocks in the FTSE 250.
Is this yield sustainable? There are no guarantees, but it’s just possible that Vedanta will be able to avoid further cuts.
Vedanta has a proven ability to generate free cash flow at quite low commodity prices. The group’s interim results for the six months to 30 September showed free cash flow of $1.3bn. Net debt fell by $0.9bn to $7.5bn during the period.
The forecast dividend of $0.36 per share will only cost Vedanta $100m to pay, as the group has just 276m shares in circulation. I suspect that chairman and 68% shareholder Anil Agarwal will be reluctant to cut this payout unless conditions get much worse.
Vedanta is still quite risky, but I suspect it could be a good income buy at current levels.
Lancashire Holdings
Specialist insurer Lancashire Holdings (LSE: LRE) covers assets such as oil rigs and cruise ships. The group also provides catastrophe insurance for property assets such as power stations and airports.
Market conditions have been soft in recent years. Rather than cutting prices or relaxing its underwriting standards, Lancashire has simply returned surplus cash to shareholders. In 2015, the group declared ordinary and special dividends of about 70p. At the current 555p share price, that gives a trailing yield of more than 12%.
Lancashire paid out a similar amount in 2014, but the outlook will eventually change. A surge of claims or an upturn in business conditions would reduce the group’s surplus capital.
Another concern is that one of Lancashire’s three divisions, Cathedral, has seen a number of senior departures recently. We don’t yet know if this is significant.
Lancashire currently trades on 11 times 2016 forecast earnings and has a forecast yield of 9.2%. I suspect this could be a good buy, but the complexity of the business makes it hard to be certain.
