2 tried-and-tested 6% dividend yields I’d buy today

Roland Head explains why these high-yielders may offer unusually safe dividend payouts.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I’m going to look at two dividend stocks with yields of about 6%. I believe these companies’ payouts are much safer than you might expect from such a high yield.

These numbers tell the story

Shares of oil services group Petrofac Limited (LSE: PFC) edged higher this morning, after the firm published a solid set of results for 2016. Revenue rose by 15% to $7,873m, while the group’s underlying net profit rose from just $9m last year to a more comforting $320m.

The group drew a line under its troublesome Laggan-Tormore project and booked new orders worth $1.9bn, giving Petrofac “excellent visibility for 2017”. The start of a recovery in new orders is welcome news, as the firm’s order backlog has fallen by 30% from $20.7bn to $14.3bn over the last year.

Should you invest £1,000 in Gamma Communications Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Gamma Communications Plc made the list?

See the 6 stocks

Petrofac’s shareholders have enjoyed a stable dividend throughout the oil market slump. The board confirmed today that the full-year payout will be left unchanged at 65.8 cents per share for 2016. That’s equivalent to a yield of about 5.9%.

A dividend payout that’s remained flat for several years — like Petrofac’s — is often a warning that the payout isn’t as affordable as it should be. But I don’t see this as a big risk at Petrofac, thanks to the group’s strong cash generation.

The last two years have been difficult for Petrofac, but in both years the group’s free cash flow generation was enough to cover the dividend payout at least 1.6 times. Last year’s strong cash flow also enabled the group to cut net debt by 10%, providing further protection for the dividend.

At around 895p, I calculate that Petrofac shares are trading on a trailing price/free cash flow ratio of 10. That seems cheap to me. With the shares also trading on a 2017 forecast P/E of 10, I personally would rate Petrofac stock as a strong buy.

This one is a bit different

Phoenix Group Holdings (LSE: PHNX) may not be a company you’re familiar with. It’s a specialist insurance firm which consolidates and runs closed life assurance funds.

What this means is that it buys life funds from other insurers and then runs them down — collecting premiums and paying out claims — until the policies end. Phoenix doesn’t sell insurance itself.

The attraction of this business is that if it’s well run, it can generate a lot of surplus cash. Last year, Phoenix generated £486m of cash from its operating companies, beating its target for cash generation of £350m-£450m.

This cash generation will be used to fund the group’s dividend. Phoenix is expected to pay a total dividend of 47.8p per share for 2016. That’s equivalent to a total payout of £188m. As you can see, this is covered more than twice by last year’s cash generation of £486m.

Phoenix stock currently offers a forecast yield of 6.2%. This payout is expected to rise by about 2.5% in 2017, keeping it in-line with inflation. I believe these shares could be an excellent buy for investors looking for a consistent, dependable income from shares.

Should you invest £1,000 in Gamma Communications Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Gamma Communications Plc made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Petrofac. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »

Close up of manual worker's equipment at construction site without people.
Investing Articles

Down 65% from its highs, this FTSE 250 stock is one to consider buying low

Shares in a strong FTSE 250 company going through a cyclical downturn have caught Stephen Wright’s attention as a potential…

Read more »

Investing Articles

£20,000 invested in a Stocks and Shares ISA 5 years ago is now worth…

Stocks and Shares ISA investors have reaped enormous returns since the pandemic, but how much money have they actually made?…

Read more »