Finding sustainably high-yielding assets in this era of low interest rates has been difficult. Some stocks may appear good initially, but turn out to be yield traps because a dividend cut is on the cards.
One example of that risk would be BHP Billiton Limited's (ASX: BHP) large dividend before it was cut because revenue dropped significantly.
There is another risk when buying very high-yielding stocks. Perhaps the business is paying out almost 100% of its profits, so when it wants to grow the business it might have to cut its dividend. There's a possibility that Telstra Corporation Ltd (ASX: TLS) may cut its dividend .
Here are two stocks with huge yields that I think could be sustainable:
G8 Education Ltd (ASX: GEM)
G8 is Australia's largest listed childcare centre business with a market capitalisation of $1.2 billion. It has rapidly expanded in recent years by acquiring a large number of childcare businesses. At 30 June 2016 it had 478 Australian childcare centres and 20 in Singapore. Management expect to settle a further 12 centres in the second half of the year to December 2016.
G8 has stuck to paying a fully franked dividend of $0.06 per share every quarter since January 2015. It's paying out a large percentage of its cashflow, but not all of it. In the half year to 30 June 2016 its net cash from operating activities was $33.17 million, whereas its total dividends paid out was $30.85 million which is 93%.
You'd be right to think G8 Education's dividend yield would be large as a result of this. It has a grossed up dividend yield of 10.71%. The yield alone is higher than the historic 10% average returns for shares. Analysts don't expect the dividend to increase again until 2018, but that would provide a satisfactory return until then.
G8 is trading at 10.6x FY17's estimated earnings (source: Commsec) which is low, but I don't expect much growth in the medium term.
Cromwell Property Group is a manager of properties and property funds with a market capitalisation of $1.55 billion.
Cromwell has been viewed as a highly leveraged business for a few years now, but management is slowly lowering the gearing. In 2015 its gearing was 45%, in 2016 it was down to 43%. The dividend payout ratio in FY15 was 94%, this improved to 87% in FY16.
Even with decreasing leverage and a lower payout ratio, Cromwell managed to increase its distribution in FY16 by 4.3%. Cromwell has increased its dividend every year since FY12.
Management has disclosed that distributions will be at least 8.34 cents per share during FY17. That means Cromwell is trading with a forward yield of 9.37%.
Foolish takeaway
Sometimes overpaying for growth stocks can be a problem for investors. It's also possible to overpay for dividend stocks. However, both Cromwell and G8 have shown they can at least maintain their payouts, with a chance of increasing dividends in the long term.
