2 high-growth stocks with massive dividend yields

There aren’t many stocks out there that can satisfy both income and growth investors but that doesn’t mean they don’t exist. In fact, with an expected 4.1% yield for the year and double-digit rise in earnings, £295m market cap asset manager River and Mercantile (LSE: RIV) seems to fit the bill.

Unlike many asset managers that have seen net client redemptions become a common occurrence, River and Mercantile’s funds continues to perform well enough to draw in new money, the lifeblood of all asset managers. In the 12 months to June the company recorded £3.8bn in net inflows, which together with high returns from its funds, led to a staggering 22% year-on-year rise in assets under management to £31bn.

Of course, as the company increases its asset under management, margins rise considerably as the fixed costs of paying fund managers and back office functions consume a smaller proportion of revenue. The company hasn’t yet released full-year financial results, but the significant increase in assets under management for the year to June suggest last year’s pre-tax margins of 24% should rise by a substantial amount.

This is especially true as the company expects to record £12.5m in performance fees for the year, an astronomical increase over the £1.5m recorded in the year prior. And since the company paid out 100% of its profit from these performance fees last year as dividends, investors should expect a bumper payout this year. This is why analysts have pencilled in a 14.75p full-year dividend that would yield 4.1% at today’s share price.

The company’s shares are pricey at 21 times forward earnings and for an asset manager of this size, earnings can be incredibly unpredictable due to volatile performance fees. But investors looking for that rare combination of growth and income could do a lot worse than River and Mercantile.

New kid on the block 

Another one of these rare stocks is pension administration specialist Xafinity (LSE: XAF), which analysts are expecting to post a 14% rise in earnings per share this year and offer shareholders a 3.9% yield.

Analysts are basing this solid level of growth on the company’s ability to continue selling its consulting and advisory services to companies desperate to get their pension schemes in good order. The market for its defined benefit plans services is unsurprisingly large as many companies’ DB plans are essentially gaping holes eating cash with interest rates as low as they are today.

Furthermore, operating in such a critical-but-complex and highly regulated industry means the need for Xafinity’s services rises with each new regulatory mandate. This gives the company significant pricing power that is exercised last year to produce underlying EBITDA of £17.46m from £52.04m in revenue.

However, there are a few reasons to be cautious. The company only went public in February, revenue growth last year was a tepid 1%, pre-tax losses for the year rose to £12.8m, and net debt ended the year at 1.6 times EBITDA. Xafinity may turn out to be a great growth and income share, but as with all new IPOs, it’s worth doing an extra level of research before investing in it.

A much more reliable growth option is the Motley Fool’s Top Growth Share of 2017, which has increased sales every year since going public in 1997. This founder-led firm’s stock has already risen in value over 175% in the past five years but the Fool’s Head of Investing believes it could triple in the coming decade.

To discover why, all you need to do is follow this link to collect your free, no obligation copy of his report. 

More reading

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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