RHG delivered investors a fully franked yield of just under 43 per cent in the year to 30 June, and Karl Siegling, whose fund Cadence Capital owns 15 per cent of the re-named Rams Home Loan book, reckons that it will deliver “conservatively” a dividend yield as high as 25 per cent in current financial year.
“It’s a cracker. RHG just keeps producing cash flow,” says Siegling.
He says that at 41 cents, for the first time it is trading below its cash backing per share of 42 cents.
The mortgage book reduces in size as it gets paid out, but Siegling says that this “should be returned to shareholders”. For his sake, Radar hopes that this is the case.
Under the Radar spoke to a number of the top fund managers in small caps about dividends in the sector and it appears that while not eclipsing RHG’s offer, there are some hefty yields on offer.
In the frenetic fight for investors’ money, small caps are leading the way when it comes to returning money to shareholders in the form of cash.
Frank Villante of Celeste Funds has been a fund manager for longer than some investors have been alive. He is on a buying spree right now because these yields of 6 per cent and more, plus franking credits worth another 3 percentage points will not last for much longer.
In case you didn’t know, franking credits are tax credits investors receive because companies are distributing profits that have already been subject to tax.
Aussie bonds at record low yields
Villante believes that investors will cotton on to the fact that the Australian 10-year bond yield, which reached a record low of 2.8 per cent last month, won’t give them the retirement that they reckon they deserve:
“These (dividend) yields reflect the wonderful migration from “equities are great” to “equities are terrible”.
"Like lemmings, people rush off to fixed interest and disconnect with high-quality companies with good balance sheets and strong yields," he said. "They always come back because you can’t get this kind of value from bonds."
Celeste Funds’ high-yielding small caps include the electrical appliance group Breville (BRG), which has a fully franked yield of 6 per cent, while accounting services group WHK (WHG) and GUD (GUD), the owner of Sunbeam and other consumer brands both have 8 per cent fully franked yields.
Brian Eley of Eley Griffiths, one of Australia’s biggest independent fund managers, says that in uncertain times such as this, dividends are highly prized:
“People hunt for a yield when they’re cautious. When you’re punching the sky and you’re bullish, you don’t care about yield; you just look for a share price that’s going up.”
Without dividends it’s speculation
Mr Eley tells Under the Radar that he uses the propensity of some small cap stocks to produce massive dividends to balance out his portfolio. His fund’s holdings include Ardent Leisure (AAD) which is a trust structure owing assets such as Dream World and AMF Bowling.
It has a yield of almost 12 per cent. His fund also owns Victorian electricity utility SP AusNet (SPN) which delivers a yield of about 8 per cent.
Under the Radar’s Portfolio Manager says that “without dividends there is no point to investing; without dividends, it’s speculation.”
Most of the companies in the portfolios above have market caps of $500 million and above. They are far bigger than the stocks Under the Radar tips. As you get smaller, the dividend yields are bigger, because of the need to attract capital. Internet domain name specialist Melbourne IT (MLB) has a market cap of $138 million and is a tip that has so far delivered our subscribers a return of over 20 per cent in seven months. We still like it partly because it is trading on a fully franked dividend yield of just under 10 per cent.
In the small cap world these days, it’s not hard to find big dividends.
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