With stockmarkets still close to all-time highs, it’s become increasingly tough for income seekers to source stocks at a decent price. In fact, the typical dividend yield paid by a FTSE All-Share (ASX) company now sits at a mediocre 3%.
However, broker Liberum points out that this masks the fact that the proportion of shares paying twice the median dividend yield is near to post-crisis highs.
While it said its own concerns around consumer weakness remain, it is confident that there are still opportunities to be found within this group.
The broker notes that these dividend yield outliers have historically offered 12-month returns averaging 25% more than the market for those whose earnings cover the dividend by more than 1.2 times.
Liberum’s list of the FTSE 350's (NMX) ‘extremely high yielders’ is topped at 8.3% by Galliford Try (GFRD), whose shares have lagged peers by 50% since the start of 2017, despite a construction write-off worth only 8% of its market cap.
With a target price of 1,473p, Galliford Try has also replaced The AA in Liberum’s list of top 10 UK buys. It believes the builder’s growth plans could add at least 60% to profit before tax (in the five years to 2021) by improving earnings in each division.
Other stocks on the Liberum dividend high-yield list for which it has a ‘buy’ recommendation include Kier Group (KIE) at 6.8% and Stagecoach (SGC) at 6.6%.
The transport group is one of five stocks out of 19 listed not to have cut its dividend since 2007. GlaxoSmithKline (GSK), yielding 6.2%, is one of the others, alongside utility SSE (SSE), support services giant Capita (CPI) and tobacco heavyweight Imperial Brands (IMB).
GSK also continues to feature in Liberum’s ranking of top 10 UK buys, with a target price of 1,760p and a price/earnings (PE) ratio of 12.1.
Liberum believes that ongoing concerns over respiratory pricing and R&D have unfairly weighed on the stock. Instead, the broker believes the earnings outlook is better than consensus expects and that there is a 16% upside in value if GSK can deliver just breakeven R&D over the longer term.
In fact, Liberum says that recent underperformance in pharma and healthcare has left it one of the three cheapest sectors versus its history on a PE basis.
As well as Galliford and Glaxo, Liberum’s other best buy ideas are Ashtead (AHT), Balfour Beatty (BBY), ITV (ITV), OneSavings Bank (OSB), SSP Group (SSPG), TP ICAP (TCAP), Unite (UTG) and ZPG (ZPG).
Other developments in Liberum’s monthly strategy update include the addition of Barratt Development (BDEV) to its list of top 10 ‘sells’.
With Barratt above its target price of 537p, the stock is Liberum’s least preferred housebuilder given “a short landbank and low margins that make cash flows vulnerable to a downturn”.
The other nine ‘sells’ are Anglo American (AAL), Debenhams (DEB), Domino's Pizza (DOM), Hargreaves Lansdown (HL.), Halma (HLMA), Mitchells & Butlers (MAB), Pets at Home (PETS), Provident Financial (PFG) (click here for more on the doorstep lender’s latest setback), and Pearson (PSON).
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.