The stock market crash in March left many shares trading at bargain levels. Some share prices have risen since then, but I think there are still some good, cheap shares out there for investors.
Dividends are making a return to the market too. After widespread cuts earlier this year, there are now some attractive yields on offer. The two stocks I’m looking at today both offer forecast dividend yields of more than 7%. I reckon both payouts look sustainable.
I’d ring up this 7% yield
Vodafone Group (LSE: VOD) cut its dividend in 2019, but analysts believe the group’s shareholder payout is now back on the path to growth. I’m confident too. The FTSE 100 telecom group’s forecast yield of 7.2% looks safe to me. During the stock market crash earlier this year, Vodafone was one of a small number of FTSE high-yielders not to suspend its payout.
If you’ve had a look at recent broker forecasts for Vodafone, you might question this. The latest consensus figures suggest that it will report earnings of 6.7 eurocents per share this year, but pay a dividend of 9 cents per share. Is that really affordable?
The answer lies in accounting rules that mean Vodafone’s reported profits are much lower than the free cash flow generated by its operations. Without getting into too much detail, this relates to the way that past acquisitions are accounted for.
What we need to know is that Vodafone’s cash generation remains strong. Last year, it reported an accounting loss, but still generated free cash flow of nearly €5bn. This was enough to cover the dividend twice. A similar result is expected this year.
When combined with the measures CEO Nick Read is taking to slim down and consolidate the group, I’m confident that Vodafone’s 7% yield will remain safe this year.
A stock market crash bargain?
FTSE 100 cigarette giant British American Tobacco (LSE: BATS) isn’t everyone’s cup of tea. But all the numbers suggest to me that this stock is seriously cheap at the moment.
The BATS share price has been hit hard by the stock market crash and has fallen by 20% this year. But the firm’s numbers show a much more stable performance.
During the first half of the year, the company gained an extra 0.5% market share and added 1.1m new “non-combustibles consumers”. I think this means customers buying vapes and oral tobacco pouches.
Adjusted operating profit for the six-month period rose by 3.3% to £5.4bn and the quarterly dividend was maintained. Management expects full-year profits to rise this year, even with some disruption to sales from Covid-19.
Despite this strong performance, the shares currently trade on less than eight times forecast earnings, with a dividend yield of 8.5%. My sums suggest this payout should be comfortably covered by surplus cash, as it was last year.
Although tobacco faces headwinds due to health issues and the risk of declining demand, I can’t help thinking that this is too cheap for such a profitable business. I suspect that income fund managers looking for reliable yield will gradually move into this stock, despite ethical concerns. In my view, the shares are a solid buy for dividend investors.