Can you really invest your cash in shares today and enjoy a sustainable 8% income? It’s often said that dividend yields of more than 6% are generally at risk of being cut. But as with all rules, there are exceptions. Today I’m looking at two stocks with forecast dividend yields of 8% or more for the current year.
Accidental profits
Legal services firm NAHL Group (LSE: NAH) operates in the personal injury market, generating leads for solicitors who handle claims. It also works with critical injury cases and has an unrelated service providing conveyancing leads.
The business has two parts — marketing and legal services. The structure of the legal operations has changed in recent years due to regulatory changes. This highlights a major risk with this type of company — it’s vulnerable to political and regulatory interference.
However, my impression is that NAHL is quite a well-run firm. Despite dealing with a changing regulatory environment it’s been consistently profitable and cash generative in recent years, operating with very little debt.
On track to deliver an 8% yield
In a trading statement today, the firm said that trading during the first half of the year had been in line with expectations. According to chief executive Russell Atkinson, “earnings are in line with our plans”.
Based on the group’s revised dividend policy of paying out half the group’s earnings each year, analysts expect a full-year dividend of 9.5p per share, giving the stock a forecast yield of 8%. Trading on a forecast P/E of 6.2, the shares seem cheap.
Overall, my view is that the stock’s valuation reflects the risks facing investors in this business. If NAHL continues to perform well, then I think the shares could be a good income buy at this level.
A potential bargain?
With a market cap of under £60m, NAHL might be too small for some investors. One larger company offering a super-sized dividend yield is housebuilder Crest Nicholson Holdings (LSE: CRST).
Crest’s forecast dividend yield of 8.5% is one of the highest in the FTSE 250. But the firm’s shares have fallen by 28% so far this year, as investors have taken fright at the firm’s falling profit margins.
Expensive houses are harder to sell
The Surrey-based firm’s main focus is on London and the south of England. Prices are flat in these markets, according to management, but the cost of building houses is still rising. As a result, Crest’s operating profit margin fell from 19.1% to 17.2% during the first half of this year, compared to the same period last year.
It’s worth noting that some company insiders have seen the stock’s decline as a buying opportunity. And to be fair, the company still appears to be in good financial health.
Earnings are expected to be broadly flat this year, at about 65p per share. The company has indicated plans to pay a dividend of about 33p for the full year. These figures put the stock on a forecast P/E of 6, with a prospective yield of 8.5%.
Despite this tempting price tag, I’m uncomfortable investing in a firm with falling margins after such a long housing boom. I believe there are better opportunities elsewhere in the property sector.