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For the past few years in volatile and uncertain times, investors have been chasing dividend yield. While the market has staged a recovery, astute investors will continue to buy solid and reliable income stocks to balance up their portfolios. In a low interest rate environment, yield stocks appeal even more.

Today, four experienced stockbrokers put forward their top income stocks for 2013.   

James Samson, Lincoln Indicators

Wesfarmers Partially Protected Shares (WESN)

Chart: Share price over the year to versus ASX200 (XJO)

Samson says the industrial conglomerate’s ordinary shares provide a strong and stable income. But he believes WESN affords an opportunity in the form of additional protection. He says WESN converts to Wesfarmers shares at a price of $43.11 on November 1, 2015. If the ordinary shares are trading below $43.11, but higher than $34.49 at this date, the company will make up the difference by providing WESN investors with additional WES stock to meet the value of $43.11 for each share. WESN was trading at $38.66 on February 12. So Samson expects only upside for WESN between now and late 2015.

“Given WESN shareholders are still eligible to receive WES dividends, we believe this represents a rare long-term opportunity to lock in a protected investment offering healthy income,” Samson says. “If equity markets turn sour because of an adverse event in the US, Europe or Australia for that matter, WESN investors are partially protected between $34.49 and $43.11.”

Samson is forecasting Wesfarmers will pay a fully franked dividend yield of 4.61 per cent for full year 2013, equating to grossed up yield of more than 6.5 per cent.     

G8 Education (GEM)

Chart: Share price over the year to versus ASX200 (XJO)

Samson says G8 offers a bright outlook because there is strong demand for its childcare services. The company continues to buy operating childcare chains and early learning centres in Australia and Singapore.    

“Despite a meteoric rise in 2011 and 2012, we believe the company is in the right place at the right time in terms of industry consolidation in the wake of market decimation left by ABC Learning,” he says. “While some investors would shiver at the thought of owning shares in a listed childcare operator after the ABC Learning disaster, GEM pays a steady quarterly dividend and offers strong cash flow to underpin the growing payout. We believe G8 will perform well in 2013 and may be suited to the marginally more aggressive income-focused investor.”

He says the forecast fully franked dividend yield for 2013 is 4.28 per cent, equating to a grossed up yield of 6.1 per cent.

Peter Arden, Russell Research

Adelaide Brighton (ABC)

Chart: Share price over the year to versus ASX200 (XJO)

A firm with a long history dating back to 1882, this integrated construction material and lime producing group is well managed, which makes it appealing to Arden.   

“Despite weak housing and construction data, ABC has kept growing by constantly reducing costs and improving efficiencies,” Arden says. “At the same time, it’s been curtailing its energy and environmental impact. ABC has broadened its business base via astute niche acquisitions.

“ABC is one of Australia’s major cement makers and its wise diversification continues to generate more sales. Continuing development of its globally significant lime business enables it to take advantage of burgeoning demand in the resources sector.”

Arden says ABC is trading on a prospective fully franked dividend yield of about 5.2 per cent from modest earnings growth of about 7 per cent. He says ABC is priced on an undemanding prospective price/earnings ratio of about 13.5 times for 2013.

Charles Thomas, Bell Potter Securities

Westpac Capital Notes (WBCPD)

WBCPD is Westpac’s new convertible preference share offering.

Thomas says the book build margin was set at 3.20 per cent – at the bottom end of the range – and strong investor demand saw the issue scaled up from $500 million to $1.25 billion.

“This 3.20 per cent margin above the current 90-day bank bill rate of about 3 per cent provides a grossed up yield of about 6.2 per cent, or 4.3 per cent fully franked, which compares favourably with term deposit rates marginally above 4 per cent,” he says.

“As the 3.20 per cent issue margin remains historically high, a continuing improvement in credit margins, combined with a six-year duration to the March 2019 optional redemption date, provides the potential for WBCPD to trade at a modest premium.”

Carey Smith, Alto Capital

Cabcharge Australia (CAB)

Chart: Share price over the year to versus ASX200 (XJO)

Offers diversified technology and financial services to the taxi industry. Its has a 49 per cent stake in associate company, ComfortDelGro Cabcharge, with a fleet of more than 1500 buses and coaches providing services in New South Wales and Victoria.

Reported net profit after tax for the year to June 30, 2012 was up 30 per cent to $60 million. The company paid a full year dividend of 35 cents a share, up 5 cents on the previous year. Smith says CAB’s balance sheet is very strong, with only $21.5 million in intangibles and a very manageable debt-to-equity ratio below 40 per cent.

“A return on equity above 20 per cent, interest cover over 10 times and strong free cash flows enables CAB to profitably reinvest retained earnings to grow its businesses,” Smith says. “CAB is likely to continue paying out between 60 and 70 per cent of its underlying profit as dividends. With $59.7 million of unused franking credits, we expect the group to retain its dividend payments going forward.”

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