Overlooked yields

RELATED QUOTES

SymbolPriceChange
EHL.AX0.26+0.0050
GUD.AX5.380.000
NWH.AX1.16+0.0150
^AXJO5,517.80+38.50
WES.AX43.99+0.530

The S&P/ASX 200’s (^AXJO) (XJO.AX) substantial climb since its lows mid-last year can largely be attributed to rising investor confidence, record low interest rates and high employment figures. The ‘Blue Chip Bubble’ is another major reason behind the climb.

Investors have driven the share price of Australia’s largest companies such as Woolworths (WOW.AX) and Wesfarmers (WES.AX) and the Big 4 banks soaring, searching for dividends and what they perceive to be a ‘safety zone’ – despite the extremely high P/E ratios to these companies’ names.

Investors who are looking for high yields would be wise to look elsewhere than at the blue chips – it seems they could have already run their dash! These three companies offer very (very) attractive yields:

NRW Holdings Limited (NWH.AX) is a service provider to the mining and resources sector, functioning in Australia, Guinea and West Africa. For HY12, the company increased its revenue by almost 33% and its net profit by 7%. With the recent decline in the mining industry however – and the cloud looming over the industry’s future in investor’s heads – the company’s share price has dropped from $4.24 to $1.63 in the last year. Nonetheless, the company kept its interim dividend as 8c per share, giving investors a 10.6% dividend yield.

Emeco Holdings Limited (EHL.AX) is one of NRW’s slightly smaller competitors. Unlike NRW, Emeco’s revenue and net profit did decline in HY12 compared to HY11, where revenue was down 9.7%. Keeping its 2.5c per share interim dividend, the company offers a 9.3% yield. In recent times however, it has been recognised that the mining industry is more a ‘value industry’ than it is a ‘growth industry’. Despite the very attractive yield, investors would be unwise to purchase into the company purely for the yield.

G.U.D. Holdings Limited (GUD.AX) is the owner of key brands such as Sunbeam, Ryco Filters and Oates. G.U.D.’s revenue grew only slightly for HY12, whilst net profit, operating cash flow and EPS all fell considerably (EPS fell from 33.1c in HY11 to 26c in HY12). The company actually reduced its interim dividend by 13.33% to 26c per share this year, yet still offers an 8.5% yield. The company’s share price has fallen 18% since the beginning of the year in light of the poor reporting period.

Foolish takeaway

The blue chip companies have been a key driver of the Australian share market’s bull rally and have paid some attractive dividends to investors, however, many of these stocks could now reasonably be considered as overpriced. Those who are looking for high yield stocks should look at companies within industries that are currently being overlooked by the majority of the market, such as those mentioned above.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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