It's no secret that with bank interest rates hovering at 2% (and predicted to fall further in the short term) the hunt for a higher yield among investors is as fierce as it has ever been. The market is currently rushing to what are considered the most 'reliable' income-producing stocks, including Telstra, Woodside Petroleum and the big banks.
However, simply targeting yield percentage without considering share price can often be detrimental to your portfolio's value. As seen with the recent fall in the share price of the Commonwealth Bank of Australia (ASX:CBA) in May, the current market environment is causing investors to overlook the potential capital losses that can occur in the wake of nominally large yields.
As investors continue to look for a better yield in this low interest rate environment, it's important to focus on solid, fairly priced stocks with good opportunities for growth. The following are three examples of stocks that I think present great growth prospects while offering solid dividends to shareholders.
- QBE Insurance Group Ltd. (ASX:QBE)
Once a profit powerhouse, QBE offered investors massive returns only a short time ago. In 2009, shareholders received a payout of $1.28 per share, which after being franked at 20% represents more than a 9.5% yield on today's price. Unfortunately, recent unsuccessful expansions into overseas markets and high claims due to poor weather conditions have put QBE on a downward spiral. Under a new management team led by CEO John Neal, the company is shifting its focus onto the core profit centres.
Although down from its previous highs, QBE is now sporting a forecast dividend of 3.3% with 100% franking in 2015. With the removal of poor performing business lines, such as the sale of its Argentine worker's compensation business in February this year, QBE may well be back on the upward path to its previous profit highs. If it's successful, investors will have the potential for some solid capital gains while maintaining a healthy dividend along the way.
- REA Group Ltd. (ASX:REA)
The operator of Australia's leading real estate website (realestate.com.au) may seem like an odd pick when hunting for yield. Analysts are forecasting a modest yield to shareholders of between 1.8-2.0% before franking in the 2015 financial year.
REA Group currently provides a 50% payout ratio, which is quite low when compared with other leading online operators. Further, investment in international real estate websites is becoming a key focus of the company's future, as shown by the decision to take a significant stake in southeast Asia's iProperty Group Ltd. (ASX: IPP). Attractive international growth prospects coupled with a nominally low payout ratio could spell big dividends in the medium term.
- G8 Education Ltd. (ASX:GEM)
This aggregator of childcare centres has fallen out of favour with investors in recent months. In fact, the price has been driven so low that G8 now sits on a huge forecast dividend yield of over 9.1% after franking.
As it expands in the highly fragmented childcare industry, G8 continues to purchase more centres under a strict policy of paying no more than four times annual earnings for a given centre. Although it presents more risk than the two companies above due to the potential changes in government policy surrounding the industry, G8 provides investors a massive yield along with solid capital growth.
Foolish takeaway
All three of the above companies offer investors attractive yields at reasonable prices. Of the bunch, QBE appears to be the most balanced in my view. Although not out of the woods yet, QBE stands to offer investors strong growth and attractive yields while being backed by an incredibly strong brand name in the insurance market. I am a happy holder at today's prices.
