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Australian investors have enjoyed the advantage of relatively high term deposit rates compared to other countries as a safe haven.  The RBA has cut the cash rate by 1.2% over the last year and more cuts may be in the offing.  While still higher than rates in most of the industrialized world, the possibility of further cuts means it may be time for investors to look to the ASX for higher yields.  As the RBA has cut the cash rate, term deposit rates have dropped, although not at the same percentage decline.  Although already outdated, the following chart shows the term deposit rate drop following the RBA cutting the cash rate to 3.5% in early June of 2012:

Considering the variety of rates depending on term length and deposit amount it is difficult to say where rates currently are.  However, in a recent article in the online Financial Review Funds Management Director Christopher Joye claims the average bank deposit rate as of 12 October 2012 is slightly under 3.5%.

For conservative investors, the ASX contains reasonably safe high yielding stocks like Telstra (TLS) with a current dividend yield of 6.9%.  However, given the relatively poor share market performance over the last two years, investors with a little more risk tolerance might consider stocks that not only have high yields, but also have high growth prospects.

To find candidates with depressed valuations and both high yields and high growth forecasts, we used a stock screener with the following criteria:

Dividend yield of 6% or better

P/E ratio of 15 or under;

P/EG under 1.0

2 year EPS growth forecast of 15% or better.  

Here are 8 stocks to consider, ranked by dividend yield:

Company

Code

Sector

Market Cap

Dividend Yield

P/E

P/EG

P/B

Bradken Ltd

BKN

Capital Goods

$821m

8.93%

7.64

0.46

1.14

Transfield Services

TSE

Commercial Services

$840m

8.54%

9.96

0.32

0.81

Nuplex

NPX

Materials

$495m

7.89%

8.76

0.39

1.08

Australand Property

ALZ

Real Estate

$1,707m

7.26%

12.62

0.83

0.85

Chandler Macleod

CMG

Commercial Services

$201

6.92%

9.78

0.83

0.85

New Zealand Oil & Gas

NZO

Energy

$273

6.91%

12.8

0.35

0.94

QBE Insurance

QBE

Insurance

$16,156

6.37%

12.24

0.28

1.38

Sparks Infrastructure

SKI

Utilities

$2,163m

6.37%

12.89

0.57

1.62

 

Before we examine valuation and growth, let’s first look at not just the current yield, but the “quality” of the dividend.  Quality means a consistent history of dividend payments over the last ten years along with payout ratios of less than 70%.  The payout ratio is the percent of earnings paid in dividends and excessively high payout are indicators a company may be unable to continue with the dividend.  In an ideal world dividends should increase over time although in the current less than ideal environment a history of dividend payments that are reasonably consistent passes the quality standard.  Here is how these 8 companies have fared on dividend quality:

Bradken (BKN) has paid dividends every year for the past nine years with the lowest yield of 2.9% back in 2007 and yields between 4% and 5.3% with the current yield of 8.93% being the highest.  The current payout ratio is 52%.  BKN’s payout ratio exceeded 70% twice over the nine year span; 84% in 2005 and 75% in 2011

Transfield Services (TSE) has paid dividends every year for the past decade with the current yield of 8.54% the highest.  However, the dividends are not fully franked, leaving a tax adjusted yield this year of 4.7%.  The yield for the last five years has been above 4% every year.  The payout ratio was in line until this year when it reached 98%.  That bears watching

Nuplex Industries (NPX) has also paid dividends every year for ten years with the highest yield the current 7.9% and a low of 4.6% in 2004.  Dividends are not fully franked, leaving a tax adjusted yield for the year of 4.3%.  The current payout ratio is 65% with only one year going over 70% – 76% in 2007.

Australand Properties (ALZ) has a ten year track record of dividend payments over 7% every year, with the highest at 43.1% in 2008.  .  However, the dividends are not fully franked, leaving a tax adjusted yield this year of 4%.  ALZ is a property trust so high payout ratios are expected.  The current payout ratio, however, is a little high at 111% and bears watching.

Chandler Macleod Group (CMG) has failed to pay dividends in three of the last ten years.  With this year’s high of 6.92% the company’s average yield over the seven years in which dividends were paid is 4.7%.  The current payout ratio is 73%.

New Zealand Oil & Gas (NZO) has averaged a 5.07% yield over the last five years.  The current payout ratio of 121% is not a good sign, considering last year’s payout was only 26%.

QBE Insurance (QBE) is another stock with dividends not fully franked, reducing the yield after taxes to 4.7% for this year.  The company has paid dividends every year for the past decade with a high yield of 7% in 2010 and a low of 3.3% in 2006.  This year’s payout ratio of 142% is out of line, following a 109% payout last year.  Prior to 2010 payout ratios ranged between 51% and 66%.

On the basis of high quality dividend yield, Bradken, Chandler Macleod, and New Zealand Oil and Gas look promising.  But what about valuation and growth?  The following table looks at forward looking numbers for the 7 stocks:

Company

Code

Forward P/E (2013)

5 Year Expected P/EG

2 Year Forecasted Earnings Growth

2 Year Forecasted Dividend Growth

Bradken

BKN*

6.06

0.66

16.4%

26.6%

Transfield

TSE

7.13

0.68

31.4%

5.3%

Nuplex

NPX

NA

NA

22.5%

23.3%

Australand

ALZ

11.38

2.95

15.3%

0.4%

Chandler

CMG*

7.17

0.10

30.6%

14.2%

NZ Oil

NZO*

9.32

0.51

36.9%

QBE Ins

QBE

10.31

0.49

44.1%

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