Few things get investors' blood pumping like the promise of yield, especially in our low-interest rate world. And while dividend payouts suffered a bashing in early 2020, government stimulus and rising commodity prices helped drag market yields to 2.85% by the year's end - phew!

More often than not, investors look to the top end of the market for yield stocks, but it's outside the ASX100 where uncovered dividend gems can be unearthed. 

In this episode of Buy Hold Sell, Livewire's James Marlay spoke to Michael O'Neill of Investors Mutual and Peter Gardner from Plato Investment Management to discuss five ex-100 dividend candidates. Will these small caps impress the dividend detectives or are trailing yields a trap? 

Stay tuned for a return of our new segment, Questions Without Notice, where Michael and Peter surprise each other with a never-before-seen question.

Note: The stocks featured in this episode of Buy Hold Sell were chosen for their high trailing dividend yields (dividends over 12 months divided by share price). There are a variety of reasons why yield may be high, for example, a one-off special dividend or a plunging share price. Watch, read or listen to the discussion below. This episode was filmed on 3 February 2021.

Edited Transcript 

James Marlay: Welcome to Buy Hold Sell, brought to you by Livewire Markets. My name's James Marlay, and I'm joined by Peter Gardner from Plato Investment Management and Michael O'Neill from Investors Mutual, and we're talking income, dividends, but not your traditional big caps. We're going hunting outside the ASX100 to see what we can find, a little bit off the radar, a little bit special. Peter, I'll start with you G8 Education, childcare centres, dividend yield a bit above 5%. Buy, hold, or sell?

G8 Education (ASX:GEM)

Peter Gardner (Sell): It's a sell for us. They cut their dividends back in August, we expect them to continue to cut their dividend in February, so that yield will effectively go to zero going forward is what we expect. And we just think they're a really challenged industry at the moment. There's a lot of not-for-profit in that sector, there's a lot of government intervention, and so it's very hard for them to make money. So it's a sell for us.

James Marlay: Okay. Tough outlook for Peter. What's your view, Michael? Buy, hold, or sell?

Michael O'Neill (Hold): It's a hold for us, James. So we do agree it's a very challenged sector, although it is one of the very strong beneficiaries of COVID stimulus and economic recovery. They are exposed as support measures come off and if unemployment rises. They have rebuilt their balance sheet. They raised $300 million in capital and they also benefited from $250 million in government subsidy and rent subsidy. Although they do have a hefty and embarrassing bill of $50-80 million in terms of remediation for underpaying award wages.

Nick Scali (ASX:NCK) 

James Marlay: Who would've thought couches were going to be so popular? Nick Scali roared to life in 2020, decent dividends. Buy, hold, or sell?

Michael O'Neill (Hold): That's a hold for us. It has obviously benefited strongly from the household income through stimulus, and also from spending in the home. In fact, they doubled their profit in the six months to December, and we're expecting a special dividend, high single-digit yield for the coming year. But as you've said, I mean, there's a bring forward of demand. There's only so many couches you can actually fit in your living room.

James Marlay: Peter, it's had a great run, as we say, people are not hiding couches in their garage. Buy, hold, or sell on Nick Scali?

Peter Gardner (Buy): Yeah, we still think it's got a bit more further to run. The market's not pricing that the payments are going to continue and the high spending is going to continue, and so we still think they're pretty cheap in the current market. As Michael said, they've got a huge order book at the moment, there's a lot of runway to go and we still think that's got a year or two to play out.

Cromwell Property Group (ASX:CMW)

James Marlay: Let's move to real estate investment trusts. They have traditionally been a really reliable and a good source of income, but 2020 was a challenge for them. Cromwell Property Group, Brisbane-based manager. Buy, hold, or sell?

Peter Gardner (Sell): It's a sell for us. Obviously, they've got a high yield, so we like it from that perspective. However, we're not too convinced on the total return. They've got a fair bit of leverage. Office rents are under significant trouble at the moment, and so we expect them to come off, and so with their high leverage, we're kind of expecting they might need to sell some assets or raise some capital.

James Marlay: Towering yield, up towards 10%. Buy, hold, or sell?

Michael O'Neill (Sell): It's a sell for us as well. The 20% discount to NTA might sound interesting, but at the same time, as Peter said, close to 50% are book gearing tenants like Qantas, and also a lot of exposure to the UK and Europe. And also, they did have a proportional takeover from ARA, which has since been withdrawn, so we don't see the support in the share price.

IOOF Holdings (ASX:IFL) 

James Marlay: IOOF, a business that's had a few issues over the past few years. Sometimes, a sign of distress can see an elevated yield up towards 8%. Buy, hold, or sell?

Michael O'Neill (Sell): Sell. So, their industry is very pressured from reducing planner numbers, pressure on platform fees, ongoing remediation and regulatory costs. It's a game of scale. Cost is key in competing on price with industry funds. They've got a couple of high-risk acquisitions, MLC and ANZ Wealth. They've been losing FUM, so there've been outflows from their platform which have increased in December, and they've just lost a white-label platform arrangement with BT, which should be another hole in their revenues.

James Marlay: Okay. It's screaming at us with a big number, but is it a buy, hold, or a sell?

Peter Gardner (Hold): It's a hold for us. We agree with every reason Michael has given, we just think it's very cheap at the moment, and we're giving management a bit more of the benefit of the doubt with regards to the ANZ and MLC takeovers. If they can get them right, it'll be very good value for them. But as Michael said, there's a huge amount of risk, a lot of outflows in the business.

Unibail-Rodamco-Westfield (ASX:URW)

James Marlay: Everyone is predicting the death of the retail mall, the move to online. Unibail-Rodamco-Westfield, some of the highest quality assets in the world with an attractive yield. Buy, hold, or a sell?

Peter Gardner (Hold): It's a hold for us again, it's another challenging one. We don't expect them to pay dividends in the short term, so yeah, we're not thinking investors should go in there for a dividend yield. However, they are at a big discount to their book value, and so given that they do have higher quality assets as things return to normal, we're kind of leaving it open there. That's why we've got it as a hold.

James Marlay: Westfield. Buy, hold, or sell?

Michael O'Neill (Hold): Hold. So we've seen the stock price rally a lot off the lows after the shareholders rejected management's plans to raise three and a half billion euros in equity. The plan is now to sell the US assets within the next two years to rebuild the balance sheet. Their NTA, they're trading at 40% discount, so that's a lot of upside compared to the other regional malls. But at over 50% book gearing, it's one for the brave.

James Marlay: Well, based on what our two guests had to say today, the high yield is more a flag of distress than an opportunity, so tread carefully in those high yield parts of the small-end market.

Questions Without Notice

James Marlay: Hang on there, folks, we've got a little bit more for you. It's our new segment, it's called Questions Without Notice, and it's a new segment we're running in 2021 where our guests come along with a question for their opponent and see what they can dig out as a little bit of an insight for you, our investors. I don't even know what you guys are going to ask, but I'm really intrigued to know. Michael, what's your question for Peter?

Michael O'Neill: As an investor in iron ore producers for income, what long-term iron ore price assumption are you assuming when you put your capital at risk seeking out these high short-term dividends? And what commands your decision to eventually sell the stocks?

Peter Gardner: It's a good question. In terms of the way we manage money, we're fairly pragmatic, let's say, about how we generate our income. We don't tend to just sit overweight certain stocks all the time, we move into the areas of the market that are going well at the time, and so that's been iron ore recently for us, it's been a good area to be in. 

We're not saying long-term the prices are going to maintain where they are. We think they're probably going to be around the $80-$90 a tonne for our long-term kind of assumption, but it might just take the market a fair way to get back to that, and that's why we like it at the moment. 

And so in terms of when we move, we obviously are waiting for the market to change, I guess. The way cycles generally play out, they go for longer than people expect, and therefore you want to sit in those stocks while they're doing well, and then wait for it to turn. So looking for Chinese steel production to potentially reduce, and the iron ore price to start coming down.

James Marlay: It has been unexpectedly strong. 

Peter Gardner: I mean, people were making the same claims at $120, $110 a tonne. They were saying: "The iron ore price has got to come down," and it's just continued to go up, so we think that's how cycles work.

James Marlay: Okay, return fire. What's your question for Michael?

Peter Gardner: Well, my question is actually in a similar industry to Michael, it's to say that I notice you're not a big fan of the iron ore players. And so I was wondering, is there anything that would change your mind on that sector, and why, in particular, you don't like that area?

Michael O'Neill: Well, when I asked you about iron ore, it sounds like sour grapes, right? Because we certainly have missed what has been an unprecedented rally driven by a tightening of supply through the dam collapse in Brazil, COVID, and also very strong demand from China. 

What we're looking for when we invest in any commodity stock is a commodity price that we can justify on long-term supply and demand. We prefer markets where supply is constrained or being withdrawn and demand is strong. One of our investments is in Incitec Pivot, where we're seeing a very strong demand environment and constrained supply in ammonia. We like to see that leverage to the upside on price. We like to buy into industries where capacity is being reduced so that the prices rise because we have a strong belief that commodity stocks ultimately follow commodity prices.

James Marlay: Well folks, that wraps up our special segment, Questions Without Notice. We hope you're enjoying the new feature in Buy Hold Sell. Remember to hit the subscribe button on YouTube to be notified each time we post new episodes, and if you enjoyed the feature, why not give it a like?

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