The downturn in the oil and mining sectors has resulted in some stocks offering unusually high dividend yields. Forecast returns of more than 7% per year are readily available.
However, the reality is that not all of these bumper payouts will survive. One of the reasons they are so high is that the market is pricing in a cut.
If you’re trying to build a high yield portfolio with genuine dividend growth potential, targeting yields of about 5% could be more profitable.
In my experience, a 5% yield can be a good indicator of a contrarian buying opportunity that could end up beating the wider market.
Today, I’ll take a look at five 5% stocks I reckon could be a profitable buy.
Aviva
Insurer Aviva (LSE: AV) needs no introduction. What you may not realise is how cheap the firm’s shares look at the moment.
Aviva stock currently trades on a 2015 forecast P/E of 9.9, falling to 9.0 in 2016. The firm’s forecast dividend payout is expected to rise by 15% to 20.9p this year, and by a further 17% to 24p in 2016.
This gives a prospective yield of 4.5% for the current year, rising to 5.3% next year. I rate the shares as a buy.
Petrofac
Shares in oil services firm Petrofac (LSE: PFC) have actually gained 15% this year, after a grim 2014 during which they fell by 42%.
Petrofac has a healthy order backlog of $20.9bn and earnings per share are expected to rise sharply in 2016, giving a cheap P/E of just 8.5 for next year.
Add to this a prospective yield of 5.1%, and I believe now could be a good time to buy Petrofac.
National Grid
National Grid (LSE: NG) offers what’s generally considered to be one of the safest dividends in the FTSE 100. Much of the firm’s income is regulated and largely predictable. This makes the firm’s commitment to increase its dividend in-line with inflation for the “foreseeable future” quite credible.
Unless inflation rises sharply, however, this policy means dividend growth will be limited to around 3% per year. That may be why National Grid shares offer a prospective yield of 5.2%, making them a classic long-term income buy.
Tate & Lyle
Sweetener firm Tate & Lyle (LSE: TATE) has had a bad run of profit warnings over the last couple of years, but the firm’s business now seems to be stabilising.
Fortunately for shareholders, Tate has managed to avoid a dividend cut, and the payout is now 22% higher than it was in 2010. Together with a falling share price, this has pushed Tate’s yield up to 5.2%.
Now could be a good time to top up.
HICL Infrastructure
Investors may not be familiar with HICL Infrastructure (LSE: HICL), but I believe the investment company’s 5% yield is worth a closer look.
HICL invests in assets such as roads and public-private projects like schools and hospitals. The majority of its assets are in the UK, with a handful in the EU and Australia.
According to HICL, its shares have delivered an average total return (share price plus dividends) of 10.8% per year since 2006. Now could be a good time for a closer look.