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Most income-seeking investors focus on blue-chip stocks for yield because they are more reliable. That’s the theory. In practice, many blue-chips disappointed on the yield front after the global financial crisis. Dividends, while improving, are still sluggish as boards prefer to retain cash rather than pay it back to shareholders through higher dividends or, better still, special dividends. The latest-profit reporting season was so-so for dividend growth but hardly impressive.

Some of the more interesting yield ideas might come from mid-cap industrial stocks that are growing earnings quickly and have rising dividends per share. These companies are an option for investors who prefer a mix of income and capital growth. They have enough liquidity for conservative portfolio investors who do not like thinly traded small-cap stocks. Here are seven to consider:

1. JB Hi-Fi (JBH)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Most small and mid-cap retailers pay low dividends because they reinvest cash into the business to speed growth. JB Hi-Fi’s dividend per share has risen from 7.2 cents in 2003-04 to 66 cents in 2009-10. The current yield of 3.7 per cent, fully franked, is expected to rise to 4.2 per cent in 2010-11 and 4.9 in 2011-12 based on consensus analyst forecasts.

Like other successful mid-cap stocks, JB Hi-Fi is moving from a pure growth stock to a growth and income stock. In fact, some analysts believe the company has potential for higher dividends over time as its earnings grow, notwithstanding the current bout of retail weakness as cautious consumers save more and spend less.

JB Hi-Fi’s yield is a good buffer if growth slows, and it has a strong balance sheet. It is a stock to watch in any price weakness as sentiment towards retailers weakens. A forecast price-earnings ratio (PE) of 12.5 times in 2011-12 looks interesting for such a well-run retailer with an excellent market position and scope for more growth through new stores. Retail gloom might create a long-term buying opportunity later this year.

2. GWA Group (GWA)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

GWA is another mid-cap with a decent yield. The building materials group has a current yield of 5.7 per cent, fully franked, rising to 6.2 per cent on consensus analyst forecasts in 2011-12. Unlike JB Hi-Fi, GWA’s dividends per share are not growing quickly; they are slightly lower since 2006 and reasonably steady over the past decade. Tough conditions in housing and construction are not good for any building materials company, but the long-term trend remains: Australia is not building enough houses to meet demand. GWA’s solid yield might suffice as investors wait for a housing recovery.

3. InvoCare (IVC)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Funeral operator InvoCare is a candidate among mid-cap stocks with solid yield. The $727-million company has a current yield of 4 per cent, fully franked, rising to 4.1 per cent in 2010-11 and 4.4 per cent in 2011-12 on consensus analyst forecasts. Dividends per share have grown from 19.5 cents in 2005 to 28.25 cents in 2010. It is hard to think of a more defensive industry than funerals, and InvoCare has a terrific market position. But it is not cheap on a forward PE multiple of 20 times earnings in 2011, falling to 17.7 times in 2012 on consensus analyst forecasts.

4. Ridley Corporation (RIC)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Ridley Corporation is another small-cap with good yield. The salt and stock-feed manufacturer has a current yield of 6 per cent, unfranked, rising to 6.2 per cent in 2010-11 and 6.3 per cent in 2011-12 on consensus analyst forecasts. Dividends per share have been steady at about 7 cents since 2005-06. Ridley reported a 6 per cent increase in net profit to $15.9 million for the half-year to December 31, a reasonable result given bad weather. But the result was below expectations and lower than a year earlier on an operational (EBIT) basis. The recommencement of franked dividend payments has also been deferred.

5. IOOF Holdings (IFL)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

Income-seekers could also consider IOOF. The wealth management group is yielding 4.7 per cent, fully franked. Consensus analyst estimates have yield rising to 5.8 per cent in 2010-11 and 6 per cent in 2011-12. IOOF reported a 16 per cent increase in half-year underlying net profit to $54.6 million – another record. Its funds under management, advice, administration and supervision increased by $3.8 billion to $102.9 billion. Believers in a medium-term recovery in global sharemarkets could do worse than consider wealth management stocks, which are strongly leveraged to the state of equity markets through their funds under management and fees.

6. Count Financial (COU)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

A smaller wealth manager, Count Financial, has grown dividends per share in nine of the past 10 years, from 2 cents in 2000-01 to 8 cents in 2009-10. Count’s record of dividends growth was only blotted during the global financial crisis (but it still paid a reasonable dividend). Count is yielding 6.4 per cent, fully franked, rising to 7.1 per cent in 2011-12 on consensus analyst forecasts. It reported earnings before interest and tax (EBIT) as unchanged at $12.2 million for the half-year ended December 31, 2010. But it expects net profit and earnings-per-share growth to exceed 25 per cent in financial-year 2011. That bodes well for higher dividends.

7. Bunnings Warehouse Property Trust (BWP)

Chart: Share price over the year to 25/03/2011 versus ASX200 (XJO)

The mid-cap real-estate investment trust, Bunnings Warehouse Property Trust, is yielding 6.8 per cent in 2010-11, rising to 7.5 per cent in 2011-12 on consensus analyst forecasts. Dividends per share are down about half a cent from their 2007-08 peak of 12.5 cents – a resilient income result compared to many property trusts.

The trust has 54 Bunnings Warehouses, one Bunnings distribution centre, one Bunnings Warehouse development site, three industrial properties and two bulky-goods showrooms. The trust is expected to raise $150 million to fund part of the acquisition and lease-back of 13 Business Warehouse properties from a wholly owned subsidiary of Bunnings Warehouse Group. It’s not flashy, but a reliable 6.8 per cent yield in this market is useful.

Tony Featherstone is a former managing editor of BRW and Shares magazines, and a business journalist for almost 20 years. He is not a licensed financial adviser. This column provides general information and ideas on market, sector and company trends, rather than specific financial advice. Readers should not imply stock recommendations from this column. Do further research or consult a licensed financial adviser before acting on information in this column. The author does not own shares in any company mentioned in this article.

 

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