Piecing the stock return puzzle together

As highlighted in my previous theme Analysts' Crystal Ball - Clear as Mud!, the present market is momentum driven and fear struck. Given the present uncertainty we step back to examine which stocks may present interesting returns from a dividend perspective.
 
We siphoned our equity spectrum (Minimum Mkt. Cap of USD 1bn) searching for Dividend Yield, Payout Ratio and Dividend Coverage. Essentially searching for companies that offer attractive yields with the ability to cover those dividend payments. We would highlight that each company should be investigated further as industry dynamics continually fluctuate, presenting both opportunities and threats.

Chart 1 highlights the usual sector suspects that offer attractive dividend yields with the exception of the industrial services which present an interesting opportunity. As always, caution should be exercised as companies may cut dividends if their operating environment remains challenging and yields have rocketed of late given the recent decline in share prices.

 
Furthermore, Charts 2 and 3 illustrate the Payout Ratio and Dividend Coverage. The Payout Ratio essentially captures how much dividends represent out of net income. The remaining portion, not paid out in dividends, is normally invested back into the company for growth. Generally, income driven investors seek a higher payout ratio. Dividend coverage measures how many times dividends can be covered by earnings. Generally, those companies with higher payout ratios have lower dividend coverage. A general rule of thumb is that a coverage ratio above one and a payout ratio less than 100 percent are preferable.



Financials represent attractive yields however, given present macro related debt concerns we remain cautious on the sector until there is a greater level of certainty around debt obligations, capital requirements, so on and so forth ad nausea. 

Telecommunications and Utilities are defensive sectors offering attractive yields and remain on income investor’s radars however, both the communications and utilities space are not free from their challenges. With governments cutting spending in order to balance budgets and on-going regulatory and energy policy changes utilities face continued pressure. Furthermore, Telecomms is a highly competitive and an ever evolving space with margin pressure a continual concern.  

Of particular interest is the Industrial Services sector, and more so those industries servicing commodity related sectors like the oil and gas drillers and bulk commodity engineering services. These sectors benefit from elevated commodity prices and the continual drive by their clients to increase resources and reserves for future production.

Table 1 below highlights a list of candidates from each mentioned sector that investors may wish to investigate further and hopefully find a gem to add to their portfolio.


Happy investing.