Diary of a Private Investor

Six of the Best Income Shares in 2017

Continuing this seasonal “Six of the Best” series, today I’ll be looking at high yielding income shares. For investors seeking primarily income, six shares is not enough of course because diversification is the key to running a true income portfolio. Indeed, I have over twenty shares in my own diversified income portfolio. However, I do hope that readers might find one or two useful ideas from my 2017 picks.

Investing for income requires different criteria than investing for growth. The goal, for me at least, is to buy sustainable income as cheaply as possible. This means I am often considering ex-growth, cash cows, out of favour stocks and value plays. I also try to keep an eye out for companies with surplus cash that might be paying special dividends in addition to their regular dividends.

#1 Safecharge (SCH)
SCH is a payment processing company with a particular focus on the gaming industry. It has over £100m in cash and has been making noises through the past year or so of using that money to make a strategic, earnings enhancing acquisition. If they don’t make a sizeable acquisition in 2017, I suspect there will be a special dividend to return some of that cash pile to shareholders.

Price at the time of writing – Bid 205p, Offer 207p

Other Metrics – Historic Yield 4.9%, Forecast Yield 6.5%, Dividend Cover 1.33, PER 11.5, PEG 1.12

#2 Royal Dutch Shell (RDSB)
I very rarely invest in FTSE 100 companies because I simply don’t have any kind of edge. They are covered by multiple analysts, have very complex, multi-layered businesses and therefore, I will be one of the last to know that my investment is about to hit the rocks. This said, RDSB is currently forecast to deliver a 6.8% dividend in 2017 on a modest PER (for the 100 index), attractive PEG and my personal view is that the oil price has bottomed. This said, dividend cover is low and the market might well be pricing in a dividend cut, so I’ll be monitoring this aspect quite closely.

Price at the time of writing – Bid 2236p, Offer 2236.50p

Other Metrics – Historic Yield 6.86%, Forecast Yield 6.8%, Dividend Cover 0.28, PER 13.9, PEG 0.31

#3 Phoenix Group (PHNX)
PHNX are a “specialist closed life assurance fund consolidator” – I trust that is clear enough. With a yield of over 6%, another reasonable PER and attractive PEG and a lot of interest from funds following the Abbey Life acquisition, this seems to be a decent income share, perhaps for the long-term given the expertise this management team have in their niche.

Price at the time of writing – Bid 732p, Offer 733p

Other Metrics – Historic Yield 6.26%, Forecast Yield 6.65%, Dividend Cover 1.27, PER 12.3, PEG 0.53

#4 Gattaca (GATC)
GATC is a much higher risk income play than the three previous candidates. The market is pricing in a miss against expectations, despite management speak to the contrary. This could be a contrarian value play, forecast to yield 9.85%. If the company meets or beats earnings expectations and is able to maintain this level of income, then I can see a decent rerate in addition to the income. This said, GATC is probably not a company I would hold for the long-term through thick and thin. Let’s see how this one pans out as it could go either way but worth a bit of risk in the context of a diversified income portfolio.

Price at the time of writing – Bid 276.25p, Offer 289.75p

Other Metrics – Historic Yield 8.06%, Forecast Yield 9.8%, Dividend Cover 1.35, PER 7.17, PEG 1.05

#5 Central Asia Metals (CAML)
CAML is primarily a copper producer with cash in the bank, turning a profit and paying a decent, sustainable dividend and I believe, the prospect of that dividend growing over time. CAML gives me exposure to a sector that I have little expertise in with a level of risk I am comfortable with, especially in a diversified setting.

Price at the time of writing – Bid 223.75p, Offer 226p

Other Metrics – Historic Yield 4.82%, Forecast Yield 6.07%, Dividend Cover 1.80, PER 11.5, PEG 1.00

#6 Watkins Jones (WJG)
I have been following WJG since their IPO during 2016 and therein lies a potential risk in owning WJG shares. I will feel more comfortable about this investment once their first full year post IPO results are published and the forecast +5% dividend is confirmed. Thereafter, I can see me building a larger stake in WJG because they have high predictability of earnings, much of it recurring income.

Price at the time of writing – Bid 117.50p, Offer 117.75p

Other Metrics – Historic Yield 1.13%, Forecast Yield 5.35%, Dividend Cover 1.86, PER 8.69, PEG 0.91

It is perhaps interesting to see the average metrics across all six of these income shares:

Historic Yield – 5.34%
Forecast Yield – 6.86%
Dividend Cover – 1.31
PER – 10.84
PEG – 0.82

From a metrics perspective, that is pretty close to my ideal income profile; income led with value characteristics.

The Value of Diversification
This will probably become an article in its own right during the year ahead but I cannot emphasise enough the value of diversification when running an income portfolio. Where capital gain is merely a useful bi-product (or capital loss a minor irritant), increased diversification leads to more certainty of income generation and significantly lower risk. In 2017 I will be running 20-30 holdings and reinvesting the income within the portfolio. Readers might have noticed from my commentary above that I know much less about these companies than I do my more focused growth portfolio. That’s the glory of a diversified income portfolio, one can rely more heavily on metrics and much less on in-depth company research. I do study the financials though and read the results statements and news announcements, especially the smaller companies.

Happy investing folks!


Disclosure – At the time of writing, I own shares in all six of the companies mentioned in this article – SCH, RDSA, PHNX, GATC, CAML, WJG


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