Finding ASX dividend shares with yields over 10% can be a dangerous game. A yield over 10% normally indicates that the market views the yield as risky, and primed for a possible dividend cut. Otherwise, it’s likely that the share price would be bid up until the yield is lower.

So let’s take a look at these 3 ASX dividend shares with trailing yields over 10% to see if we can find a diamond in the rough.

BetaShares Australian Dividend Harvester Fund (ASX: HVST)

This exchange-traded fund (ETF) employs a ‘dividend harvesting’ strategy. This means it buys ASX dividend-paying shares just before they’re about to go ‘ex-dividend’, after which the fund sells them again. In this way, it rotates in and out of most of the dividend heavyweights on the S&P/ASX 200 Index (ASX: XJO).

On one level, this strategy works to produce formidable dividend income. HVST currently has a trailing yield of 12%, or 16.8% grossed-up with franking.

Sounds pretty good, right?

Well, the downside is that this strategy trades capital value for income. There’s usually no free lunch when it comes to investing. And swapping in and out of dividend shares is no exception. Since its inception in October 2014, the fund has actually gone backwards, delivering a return of (1.17%). As such, I’m not too wild on this investment.

WAM Research Limited (ASX: WAX)

This listed investment company (LIC) specialises in buying undervalued ASX growth companies and selling them after a pricing ‘catalyst’ comes to pass. It has managed to do this quite successfully, netting investors a 13.4% return per annum on average since 2010.

WAM Research pays most of its profits out as dividends, which have been rising every year since 2010 as well. On current prices, this dividend equates to a yield of 7.01%, or 10.01% grossed-up.

LICs normally pay dividends out of a profit reserve, so let’s take a look at WAX’s tank to see how well-funded this dividend is. As of 30 April, WAM Research has 26.2 cents per share in profits against its most recent dividend of 4.9 cents per share. As such, I think this is a rare diamond of an investment which can sustain a grossed-up yield over 10%.

Alumina Limited (ASX: AWC)

Alumina is Australia’s largest aluminium pure play and has amassed a reputation as a generous dividend payer over the last few years.

On current prices, Alumina is offering a trailing yield of 7.74% – which grosses-up to 11.06% with full franking.

Unfortunately, I think Alumina’s dividend yield is unsustainable. Aluminium prices have fallen substantially in 2020, which will crimp the ability of this company to keep shovelling cash out the door. This is probably the reason Alumina shares have collapsed in 2020 so far, falling from $2.30 at the start of the year to today’s closing price of $1.51.

I have to agree with the market sentiment on this one that Alumina’s dividend isn’t sustainable going forward.

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Motley Fool contributor Sebastian Bowen owns shares of WAM Research Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The PayGroup Ltd (ASX: PYG) share price had an impressive run on the ASX today, closing 12.10% higher after being up by as much as 19.35% throughout the day.

Based on today’s closing price of 69.5 cents, PayGroup’s market capitalisation stands at only $48 million. So it’s important to note that we’re very much at the smaller end of the ASX spectrum here.

PayGroup is a specialist human capital management software and services provider, tasked with performing payroll, pay to bill, human resources, and treasury services on behalf of clients. It has 2 businesses, PayAsia and Astute, the latter of which was acquired in late 2019.

The company operates primarily in the Asia Pacific region for multinational companies and has 875 clients throughout 33 countries.

Why did the PayGroup share price race higher today?

Well, this afternoon, PayGroup released its preliminary final report for the year ended 31 March 2020.

The company delivered FY20 annual recurring revenue of $17.8 million, exceeding guidance of $17.5 million. Meanwhile, revenue came in at $10.9 million, up 110% on the prior corresponding period, including a $2.9 million contribution from Astute.

Astute provides workforce management solutions, automating placement through to payroll and invoicing. The acquisition was completed on 1 November 2019 and its 5-month contribution to FY20 results have reportedly exceeded forecasts. During this period, Astute has been profitable and cash flow positive.

Overall, PayGroup reported growth across all segments in FY20, including 26.5% growth in PayAsia payslips. This was supported by strong sales momentum and new contract wins from the fourth quarter of FY19 and throughout FY20.

Additionally, PayGroup launched its Treasury Services offering in the second quarter of FY20. Live treasury transactions processed increased from 155 per month at the end of 1H20 to 3,653 per month at the end of 2H20. Given strong initial customer demand in the first year of its launch, PayGroup expects this offering to make a growing financial contribution in FY21.

The company’s new contract wins in FY20 amounted to $5.5 million, representing an increase of 12% on FY19. Meanwhile, new contract wins in FY21 to date (being 1 April 2020 to 25 May 2020) total $2.7 million.

Looking to cash flow, the company saw an improvement in its operating cash flow from negative $4.8 million in FY19 to negative $0.1 million in the current period. Cash flow momentum was particularly strong in the second half of FY20 on the back of continued new sales uplift and the Astute acquisition.

The company’s cash balance as at 31 March 2020 stood at $2 million, supported by a $3 million capital raising in November 2019.

COVID-19 update and outlook

As previously announced last month, PayGroup’s business has been able to adapt to a remote working environment with limited impact.

The company notes that COVID-19 stimulus packages have added to payroll complexity, which increases opportunities for both its Astute and PayAsia businesses. Against this backdrop, its sales pipeline continues to strengthen.

PayGroup expects to continue to deliver improved operating cash flows and the pathway to positive statutory earnings in FY21, driven by cost efficiencies, continued sales momentum and the positive contribution from Astute.

Commenting on the full-year results, managing director and CEO Mark Samlal said:

“We are only 2-months into our FY21 year and we expect that our businesses will continue to perform well, even if various lock down provisions continue to exist globally. In Australia we see that businesses are hiring, particularly contractors, which will positively improve Astute’s metrics. Our key markets in Asia are very resilient with many countries back to work.”

“We enter FY2021 in a good position, with a strong book of recurring revenue, 95% client retention, a cost efficiency plan and strong industry fundamentals in spite of the current COVID-19 headwinds,” he added.

More reading

• 3 ASX dividend shares with yields over 10%
• Fund managers have been buying these ASX 200 shares
• Insiders have been buying these ASX shares this week
• How does the economy affect the ASX 200 share market?
• Why this ASX 200 share is up 8% and poised for more explosive growth

Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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I think it is well worth keeping a close eye on what substantial shareholders are doing.

Substantial shareholders are shareholders that hold 5% or more of a company’s shares. These tend to be large investors, asset managers, and investment funds. These shareholders are obliged to update the market when they make meaningful changes to their holdings.

I feel investors should look to use these notices to their advantage. After all, they give investors an idea of where the smart money is going.

Two notices that have caught my eye are summarised below:

ARB Corporation Limited (ASX: ARB)

According to a change of interests of substantial holder notice, Bennelong Australian Equity Partners has been topping up its position in this four-wheel drive vehicle accessories company. The notice reveals that Bennelong has bought 1,052,952 shares on-market over the last couple of months.

The fund manager clearly took advantage of its share price weakness during the market crash (to good effect) and was able to buy as low as $13.26. The company’s shares are now trading above $17.00. These purchases took Bennelong’s holding to a total of 6,821,451 shares, which equates to an 8.55% stake.

Charter Hall Group (ASX: CHC)

A change of interests of substantial holder notice reveals that Commonwealth Bank of Australia (ASX: CBA) has increased its stake in this property company. According to the notice, the banking giant has lifted its holding in Charter Hall by ~4.7 million shares to a total of 37,363,414 shares. This means the bank now has an 8% interest in the company.

It appears as though Commonwealth Bank believes that Charter Hall’s shares have been oversold during the market crash. Even after a strong recovery over the last couple of months, the property developer’s shares are still down by almost a third from their 52-week high.

More reading

• 2 high yield ASX dividend shares to buy right now
• ASX 200 rises again, ASX banks push higher
• Are ASX bank shares finally back in the buy zone?
• ASX 200 up 2.4%: Blackmores raises $92m, big four banks jump, Nearmap rockets
• ASX 200 edges down, bank share prices fly

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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