Not all businesses paying a regular, reliable income reside in the
ASX-50. There are many mature, stable companies capped at a few billion dollars that pay a robust income too. So, while some investors stick to the ‘bluechips’, many are seeking income elsewhere. While other asset classes are part of the solution, savvy investors are also sniffing out some small stocks with big yields for their income.
In this Buy Hold Sell, our panellists Natalie Tam from Aberdeen Standard Investments and Liam Donohue from Lennox Capital review three such names that have an average yield of 5.5%, even after their prices gained 23.4% in a year.
Tune in for the verdict on these stocks, as well as each manager's nomination for a quality small-cap that offers an attractive yield today.
Enjoying Buy Hold Sell?
Hit ‘follow’ below to get notifications of when Livewire publishes its exclusive Buy Hold Sell weekly video series. In each episode, two fund managers give their views 'Buy, Hold or Sell' on five ASX listed companies.
Not recommendations, please read the disclaimer and seek advice where appropriate.
James Marlay: Welcome to Buy, Hold, Sell. Today, we're talking about small stocks, with big yields. Everyone's out there, hungry for income in the low rate environment. The big end of town, we've seen dividend cuts in the banks. Telstra, it's not quite as stable as it used to be. Here to talk about small stocks with big yields, I've got Natalie Tam from Aberdeen, and Liam Donohue from Lennox. Natalie, let's start with you. Viva Energy REIT, buy, hold or sell?
Natalie Tam: Viva is a hold for us. It's done really well this year. It's got a total return of more than 30% in 12 months, that's pretty huge. It's obviously been a beneficiary of falling bond yields, and we think the big gains have been made there. So, for us it's a hold.
James Marlay: Okay. Consolidating service stations up and down the coast, Buy, Hold, or sell?
Liam Donohue: For us, it's a buy. We still think the book value of many of their assets are a bit under done. We've seen similar portfolios from 7 Eleven, and some of their convenience stores sell at materially higher valuations than what Viva is carrying their assets out on book. So, we think with the ongoing yield support, bond yields where they are, we think it's still a buy.
James Marlay: Okay. Shopping centres Australasia, 5.5% Yield, regional shopping centres feels like it could be a bit challenged. Buy, hold, or sell?
Liam Donohue: For us, it's a hold. As you mentioned, it possibly is a little bit challenged. Offsetting that is the macro tailwind interest rates, where they are. It's pretty straight forward for the business to borrow cheaply, fund acquisitions, and deliver earnings growth, but as you mentioned, the organic earnings profile of the businesses is a little bit tough at the moment, so for us it's a hold.
James Marlay: Okay. 5.5% Yield, can you get excited about regional shopping centres?
Natalie Tam: I can. So, I'm going to correct you there. They're not regional shopping centres, they're actually neighbourhood shopping centres.
James Marlay: Okay.
Natalie Tam: So, this is a common misconception. For us, we've got shopping centres on a buy, and that's because when you think retail, you do tend to think regional shopping centres, or the large shopping centres, like the Westfield's of this world, but in fact most, of its portfolio is neighbourhood style. So, that's a Woolworths, big car park out the front, a baker, a butcher, a liquor shop, somewhere to get your nails done. It isn't the same thing as a regional shopping centre, and because of that it has quite good defensive characteristics. We also see upside here, so they've just acquired 12 assets, which they're remixing. They're are about halfway through there, so we think there's some upside potential. Also, about 40% of its rents are from Coles and Woolworths, which are experiencing very strong trading conditions at the moment. So, there's a potential for more turnover rent to come through. So, for us it's a buy.
James Marlay: Okay, great. Cedar Woods Property, a bit of leverage to their housing cycle. Buy, hold or sell?
Natalie Tam: Yep. So, Cedar woods is a buy for us. We do like its exposure. So, it's a property developer with exposure to the Perth market, and Melbourne, and smaller exposures to Brisbane, and South Australia. We think that's going to do well over the next couple of years, as house prices continue to arc upwards, particularly in Melbourne.
James Marlay: Okay. Liam, people get excited about property in Australia. Can you get excited about Cedar woods? Buy, hold or sell?
Liam Donohue: I really want to get excited about Cedar woods, but for now it's a hold, and that's mainly because of the macro. We really like management, and what the business offers, but we're a little bit reluctant to dive in, because they are at the whim of macro, so credit availability, particularly for investors, is a big driver, and as Natalie mentioned, the West Australian economy is also a big driver, with that state being their single biggest property market exposure. So, we like the business, but it's a hold.
James Marlay: Okay. What have you got for us? A small stock with a nice dividend yield, something you want to pitch to our readers?
Liam Donohue: Yeah, absolutely. Aventus property fund is one that we really like. Paying about a 6% dividend yield, at the moment. The largest large format retail centre operator in Australia, or homemaker centre, as they may be known, and even though it's retail, it is quite defensive retail, in that tenants typically pay anywhere up to a 90% lower rate per square metre, in an Aventus centre, than they would in a flagship retail mall. So, it is quite effective and efficient sales productivity for tenants. A really strong management team, just about the best in the sector. We think it's a buy.
James Marlay: Okay, great. Natalie, what have you got for is? Small stock, with a nice dividend on it.
Natalie Tam: Yeah, we like Goodman New Zealand. So, it's an industrial REIT with primary exposures into Auckland. There's really strong tailwinds that are supporting industrial assets at the moment. So, if you think about it with the ongoing proliferation of online shopping, we need more warehouses, but those warehouses have to be located near population centres, and that's what Goodman offers. It's got a really high occupancy rate, it's at 99.5%, a weighted average lease expiring in excess of five years, and the management team believe that their portfolio is under rented, by about 7%. On top of that, the valuation's very attractive. So, it's trading on a 1.2 times price to NAV, at the moment, which is cheap, and about a 3.5% yield. So, we think there's considerable upside there.
James Marlay: Okay. They might be small, but they're punching above their weight, when it comes to dividends. Look outside the big caps for a few income ideas.
Excellent tips guys, great work!
Good interview. There is one better with 30%+ ROE in the small cap land, on 13% grossed up yield :-)