Five yield payers under $5

Financial Journalist
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Income investors could easily ignore the IPO market for yield, believing floats are more about capital growth. But more floats these days have a dividend “sweetener” to entice the yield brigade.

IPOs, of course, have more risk than well-established companies. Yet the quality of floats in the past 12 months has been higher and many have notched solid post-listing gains.

Risks aside, the IPO market has some yield attractions. On a relative basis, it is hard to put new money to work in traditional dividend favourites such as the big-four banks and Telstra Corporation. Income investors who own those stocks could perhaps reduce exposure by winding back dividend-reinvestment plans and investing dividends in stocks outside the top 30.

Another attraction is more established, higher-quality IPOs, albeit with higher price tags, coming to market in this float cycle. Larger companies with stronger market positions have scope for higher dividend payout ratios, and better prospects for sustainable dividend growth.

Intense market pressure on IPOs is a further plus. IPOs that miss even the slightest prospectus forecast are now slaughtered, incentivising firms to deliver on dividends.

The ability of high-quality IPOs to offer yield and growth also appeals. When seeking yield stocks, always choose those with capacity for capital growth as well. What good are a few points of extra yield if capital losses quickly erode gains? Reliable yield and decent capital growth can be magic.

With that in mind, I have chosen five IPOs that offer yield and growth, each trading below $5. These stocks are not household names – another positive in my view, as the last place to put new money is where the “crowd” is parked, and valuation bubbles are building.

These stocks offer a mix of yield and growth and have reasonable defensive qualities (with the exception of the more cyclical SeaLink Travel Group).

1. Genworth Mortgage Insurance Australia (GMA)

Australia’s largest mortgage insurer listed on the ASX in May 2014 after raising $583 million at $2.65 a share. At $3.08, Morningstar estimates a 7.5% fully franked yield in 2014-15, based on a dividend-per-share of 23 cents.

Some brokers are forecasting a yield above 8%. Genworth has a targeted dividend payout ratio of 50-70%, suggesting scope for higher dividends in coming years. Its exposure to Australia’s strengthening housing cycle should be a steady tailwind for dividend growth over the next three years.

2. Mighty River Power (MYT)

The New Zealand electricity provider listed on the ASX in May 2013 after raising $1.35 billion at $2.01 a share. Producing about 17% of NZ electricity, Mighty River looks a steady, reliable performer. At $2.06, the expected yield in 2014-15 is 5.8%, based on consensus analyst forecasts.

The NZ election in September presents some regulatory risk if there is a change of government, and franking is an issue as NZ imputation credits in Mighty River can only be used to offset NZ income tax liabilities. Even so, Mighty River looks marginally undervalued at current prices: Macquarie Equities Research has an outperform recommendation and a $2.25 share valuation. Potential for 10% capital growth and a decent expected yield would give a handy total shareholder return over 12 months. As a utility, Mighty River has defensive characteristics that appeal to income investors.

3. Pact Group Holdings (PGH)

The packaging group had a disappointing sharemarket debut, down from a $3.80 issue price to $3.50 after raising $649 million and listing in December.

At $3.45, Pact has an expected 2014-15 yield of 5.9%, according to FN Arena. It also has good judges such as Investors Mutual on the share register. Reaffirmation of second-half dividend guidance at the interim result in February was positive, as were signs that Pact is on track to deliver prospectus earnings forecasts. It, too, has potential for solid growth and yield in the next 12 months.

4. LifeHealthcare Group (LHC)

LifeHealthcare raised $77 million through an IPO and listed in early December. Its $2 issued shares have rallied to $2.25 as the market warms to its position as a large independent distributor of medical devices, and its exposure to the more defensive healthcare sector and the ageing population.

Over half its sales come from implantable devices such as orthopaedic and prosthetic products – a clear growth market. An expected 14 cent dividend in 2014-15, based on consensus forecasts, implies a 6.2% yield, most likely unfranked until 2016. Like others on this list, that type of yield and a reasonable share price, at least for long-term investors, make LifeHeathcare another IPO to watch for income-driven investors who can tolerate investing in small-cap stocks and are willing to take higher risk in the pursuit of yield and higher capital growth.

5. SeaLink Travel Group (SLK)

The tourism operator, best known for its Captain Cook Cruises, is a good example of income opportunities in the IPO market. SeaLink listed in October 2013 after raising $16.5 million at $1.10 a share. Unlike many floats that are hastily put together, or involve a quick exit by vendors, SeaLink had a decent history of paying dividends, and was a well-established, solid operator. After rallying to $1.80, SeaLink is not cheap. But an expected 4.5% dividend, fully franked, should comfort income investors, and the long-term trend of higher inbound Chinese tourism is good news for travel operators. SeaLink is best bought on any significant share-price weakness.

– Tony Featherstone is a former managing editor of BRW and Shares magazines.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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