3 Super-high yield stocks for brave investors

Super-high-yield investing involves buying shares where the dividend yield is close to or above twice the market yield. Of course, this means taking on more risk, but the returns can be much greater as well.

For example, when I bought UK Mail in 2011 it had a yield of 8.6% because the market expected a dividend cut. The cut never came and within a year I sold UK Mail for a total return of 32%.

An even faster re-rating occurred after I bought N Brown in 2012 with a yield of 5.4%. Just eight months later the share price had increased by 47% and I sold N Brown for a total return of 52%.

Although I don’t invest in many of these situations they have, on average, worked out quite well over the years. The trick, of course, is to try to separate out those companies that can sustain the dividend from those that are about to cut or suspend it.

In November’s Master Investor magazine, I reviewed three super-high yield companies (N Brown, Carillion and Connect Group) in order to highlight some of the factors I look at in order to separate out the wheat from the chaff.

There are no guarantees of course, but hopefully you’ll find something useful in there.

Super high yield investing
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Super-high yield investing: Only for the brave

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

5 thoughts on “3 Super-high yield stocks for brave investors”

  1. Hi John,

    Great piece on super-high yield investing. May I ask a few questions on the matter? Why do you think Carillion needs to carry so much cash that earns virtually no interest, whilst paying such a high level of interest on it’s debt? Also, can you explain why you focus specifically on the level of interest bearing debt rather than net debt? Do you give any consideration to the cash on a company’s balance sheet in your risk calculation?
    Unfortunately, I bought Carillion before I had the benefit of subscribing to UKVI. Given the current very low valuation, I am inclined to hold out for now. What would you do?

    Regards

    John

    1. Hi John, I have no idea why Carillion carries so much cash. My general assumption is that companies have an appropriate cash balance for their business, and that the cash is there to pay off trade creditors and the like. So I assume that’s the case here and that the cash is there for a good reason.

      I look at gross debt rather than debt net of cash because a) that’s a more conservative approach and b) I assume the company holds cash for operational reasons rather than just to net off against or pay down debts (although of course some of it might be used to pay down debts).

      Basically I don’t look at cash at all, although I agree that more cash can be good in terms of reducing risk. Having said that, I’m always open to new ideas, so if high gross debt but low net debt (i.e. high debt and high cash) companies turned out to be less risky then yes, I might look at net debt as well as gross debt. But for now I don’t.

      As for what I would do with Carillion if I owned it, I would probably stick with it for as long as it ranked well on my stock screen. It’s a bit like BAE Systems and its massive pension scheme. I wouldn’t buy BAE today because of that pension, but since I already own it I’ll hang on for as long as its stock screen rank is okay (which won’t be very long given its current price). That way I get to stick to my plan rather than make ad hoc decisions, and at the same time get some more feedback on whether or not the pension scheme rule in its current form makes sense.

  2. Hi John,
    Your analysis was avoiding Carillion, holding Brown, looking Connect.
    Few months later, here we are with the share price:
    Connect: 140 -> 90
    Carillion: 250 -> 60 (!!)
    Brown: 192 -> 285
    So, congratulations !
    Do you have a new opinion about Connect ? I am tempted to buy under 100 (low valuation), but guess that the company is too fragile to resist a slowdown or economic crisis.
    Kind regards.

    1. Hi Eric, looks like I got three lucky strikes there! Of the three I would say Carillion was the easiest call to make. If you knew what to look for it was fairly obvious that the company was a disaster waiting to happen.

      As for Connect, its situation is similar in some ways to Carillion, but less acute:

      1) Its core business is in decline (delivering physical magazines and newspapers)

      2) The ratio of borrowings to earnings is close to my limit of 4 for cyclical companies (although I think Connect is quite defensive for a cyclical-sector company) and

      3) It has a big pension scheme, far bigger than I’d like (pension obligations are 14-times earnings, while I have an investable limit of 10-times).

      Connect has been acquiring other businesses in an attempt to move away from its declining core business, which is good. But the acquisitions were paid with borrowed money, which is not so good.

      As for the pension, there is a surplus at the moment, but pension scheme liabilities have a nasty habit of growing faster than pension scheme assets, and if the scheme does fall into deficit then that could be another weight around the company’s ankles.

      So it’s not something I would invest in at the moment, but of course you are free to do as you wish, and perhaps the shares will double over the next six months! We shall see…

  3. Buying a business in a decline environment can be profitable for the shareholders (cf books of Peter Lynch) but here the margins are so low. I feel stock-picking is difficult at the moment, it’s expensive or weak. So I am just holding or selling. Wait and see !

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