My favourite high-dividend-yield stock

A person holding onto a fan of twenty pound notes

My favourite high-dividend stock on the market at the moment is Chesnara (LSE: CSN). I like this company because not only does it offer a dividend that is nearly three times higher than the market average. But it also is selling at a historical price-to-earnings (P/E) multiple lower than the dividend yield.

High-dividend-yield opportunity

Chesnara is engaged in the management of life and pension books of business in the UK and Europe. The company acquires pension assets from other managers and then uses its size and experience to reduce costs and improve performance.

The end goal for management is to increase cash flow from the acquired books of business. The firm can then use this cash to fund further acquisitions and a dividend to investors. 

The group’s latest acquisition illustrates how the model works. Chesnara has acquired £2.9bn of assets under administration and approximately 80,000 policies from Sanlam Life & Pensions UK Limited, a specialist provider of insurance and long term savings products in the UK.

The organisation paid £39m in cash for the assets. However, management estimates that they have an economic value for the group of £48.1m. 

Based on this estimate, the company believes the assets provide “future material value creation potential from expense and capital synergies.” Better respected returns from investing the assets could enhance the overall value for the group. 

Chesnara believes there are plenty of sellers out there of these assets, which could provide a long runway for growth for the business. It could also support substantial dividend expansion in the years ahead. 

This is what I am really interested in. The company is highly cash generative, thanks to its unique business model and growing scale. It also has a track record of steady dividend increases. 

City analysts believe the company’s dividend yield will total 7.9% this year, based on an expected full-year payout growth rate of 3%.

Undervalued

As well as this attractive dividend yield, the stock is also trading at a historical P/E ratio of 6. It is incredibly rare to find a company with a dividend yield that exceeds its P/E multiple. This signifies to me that the stock is both a dividend champion and significantly undervalued. 

Based on these factors, I would buy the stock for my portfolio today.

However, Chesnara might not be suitable for all investors. Pension management can be a complex business. Even a slight change in interest rates can have a significant impact on managers’ calculations. A substantial stock market crash could also lead to disruption across the business. 

Further, the sector is highly regulated. Additional regulations could increase group costs and reduce the amount of cash available for distribution to investors.

I will be keeping an eye on these risks and challenges as we advance. 

The post My favourite high-dividend-yield stock appeared first on The Motley Fool UK.

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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Chesnara. 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.