The 'chase for yield' by investors looking to escape the low interest rate environment of bank deposits has unfortunately led many investors into a dangerous place.
It could be described as investing with blinkers on!
Just as blinkers are sometimes put on horses to stop them seeing to the side, many investors have become so intensely focussed on filling their portfolios with high yielding stocks that they have completely forgotten about the equally important other driver of their total returns, namely earnings growth. Even more concerning, some investors have completely disregarded the price they are paying to secure these yields.
To help get investors back on the right track of thinking about the two contributors to an overall return – the dividend and change in share price – here are three stocks which offer a combination of a good yield, plus solid forecast earnings growth which could help drive the share price higher in the long term.
1) Suncorp Group Ltd (ASX: SUN) – According to data supplied by Morningstar Research, Suncorp is trading on a FY 2014 price-to-earnings (PE) ratio of 18 and a fully franked yield of 6.3%. Looking out to FY 2015, earnings per share (eps) are forecast to grow by 36.6%.
2) GUD Holdings Limited (ASX: GUD) – Morningstar data puts this consumer products business on an FY 2014 PE and fully franked yield of 17.8 and 5.2% respectively. EPS growth is forecast at 8.1% in FY 2015.
3) Premier Investments Limited (ASX: PMV) is trading on a FY 2014 PE of 19 and a fully franked dividend yield of 4.2%. With EPS growth of 14.5% in FY 2015, Premier is looking attractive too.
With a number of appealing opportunities such as these three to access high yields coupled with good earnings growth prospects, investors really need to question the obsessive crowding around a few arguably overpriced blue-chip names.
