People often think you need to buy FTSE 100 blue-chip shares to secure bountiful dividends. But thats not true, and here are two smaller companies offering tastyyields.
Feel the width
Moss Bros Group (LSE: MOSB) is a lot more thanjust a place to hire fancy clobber for posh events these days. Refocusing in recent years and billing itself as the first choice for mens tailoring, the company is aiming to produce a more attractive shopping experience at its stores. And in a move that would probably horrify some of its more traditional customers of yesteryear, its also moving online.
Forthe year ended January 2017, e-commerce accounted for 11% of sales, with a 15.7% rise over the previous year. Coupled with a 5.3% rise in overalllike-for-like sales, tighter cost controls and targeted discounting, that helped boost pre-tax profit by 20% and EPS by 17%.
The company lifted its dividend by 6% too, and that leads to myfocus here Moss Bross forecast yields of 5.4% for the current year, followed by 5.6% next, on a share price of 115p. But before you rush out and snap up the shares, you need to know those payouts wont be covered by forecast earnings. So whats the story?
Back in 2014, the company massively raised its dividend to an uncovered 5p per share (from 0.9p), announcing a commitment to a significantly increased dividend while pointing to its strong cash generation. Thats stuck, with the 2017 report speaking of the debt-free nature of the business and itshealthy cash balance,and saying: It is our intention to continue this progressive dividend policy balanced against the wider investment needs of the business.
In the long term, earnings will eventually have to match and exceed the dividend for that policy to be sustainable, but in the medium term the payout looks safe to me and very attractive.
The forecast 6% dividends from Moss Bros look almost paltry compared to the 7.9% and 8.1% yields expected from Connect Group (LSE: CNCT) over the next two years, following on from several years of inflation-beating progressive rises from thespecialist distributor.
Whats more, theyd be reasonably well covered by earnings at about1.8 times, and were looking at P/E ratings of only around eight. So why the low rating for the 124p shares?
The firms net debtof150m at February 2017 must be part of it, and with earnings per share actually forecast to fall by 12% this year (and recover by 5% in 2018) after remaining static for two years, I suspect there are fears that the growth tide for Connect might beebbing. Coupled with the competitive nature of the business, Im not really surprised that theres some obvious pessimism.
But I dont share it, and I reckon the companys diversity through itsNews & Media, Parcel Freight and Books divisions (with the lesser-performing Education & Care division slated for disposal)stand it in good stead for the longer-term future. After all, it does count the mighty Smiths News among its customers.
If trading should weaken, or debt and borrowing become too troublesome, its possible the dividend could be cut. But with such a big yield on the cards and the shares on a low rating, and with no obvious threat to earnings in the medium term, I think theres enough of a safety margin to make Connect look attractive.
Growth with dividends
In the tough decision of whether to go for growth or dividends, what better than shares that can provide both? If you want to learn about a hotcandidate, check out ourTop Growth Share From The Motley Fool report.
The pastfive years have brought indouble-digit annual earnings growth, and the City’s experts are predicting two more years of solid riseson top of that. And there’s aprogressive dividend policyto add to the mix.
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