Interesting high dividend payers

Instead of cashing out of the equity market for larger returns in currencies or treasuries, high dividend yielding stocks with good earnings growth in the coming years could be a more solid way of investing. We have identified 10 stocks in our screening that are expected to have dividend yields above four percent in FY2 and have good earnings growth in the coming years. On average, analysts hold a buy recommendation on stocks in our screening, with an upside in consensus target price spreads ranging from zero to 35 percent (table 1).

The one stock that stands out in our screening is American Capital Agency (AGNC), with an expected dividend yield of 17.3 percent in FY2. In previous years AGNC has reported dividend yields of 17.9 percent and 19.4 percent in 2009 and 2010 respectively. Being a Real Estate Investment Trust, engaged in buying asset-backed securities such as MBS (mortgage-backed security) and CDO’s (collateralized debt obligation), the company is obliged to distribute most of its taxable income to shareholders in the form of dividends. However, should interest rates increase and/or liquidity become even more constrained, then the nature of AGNC’s business model could make it difficult for the company to deliver the expected future dividends.

Highlighting another dividend payer, at the other end of our list (table 1) and in the centre of chart 1, we have the Italian based tyre manufacturer Pirelli & C. Despite being located in Italy Pirelli & C has not seen its share price punished like other related “Turbo PIIGS”, however with stable revenue (of which only 10% comes from Italy) the company has gained 12.1 percent in the year to date. In dividend terms, Pirelli & C is expected to deliver just above 4 percent dividend yield in FY2 and to be traded at a price to earnings ratio of 8.5.

Basis for the screening
We wanted to concentrate on larger cap stocks, applying a market capitalisation cut-off at USD 3bn. Furthermore, we wanted stocks that are expected to deliver dividend yields greater than 4 percent for the second forecasted year (FY2). These criteria helped to identify 601 stocks that could potentially deliver good dividends in FY2. To narrow the field we looked for stocks that are expected to deliver above 14 percent growth in EPS in FY2, and good annual growth over the next three years. Furthermore, by applying an upper limit of 15 on future P/E levels as well as only choosing stocks that analysts believe to have an upside in their share performance going forward we minimised the screening result even further. All in all we ended up with 10 stocks from a range of industries.