If you've heard the term "crowded yield trade" and had no idea what the person was talking about then read on…
Ever since the Reserve Bank of Australia began reducing the official interest rate –it now stands at an all-time low of 2.5% – investors including self-managed super funds (SMSF), individuals and large institutions have been "crowding" into a handful of large blue-chip stocks which offer high fully franked yields which are viewed as maintainable.
Some of the stocks most affected by this "crowded yield trade" have been the big four banks, Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES). The keenness that investors have shown for this small group of blue-chip stocks has pushed their share prices higher and higher, for example Telstra is current trading near a 10-year high.
While owning what are arguably very full priced (even expensive) blue-chips will suit some investors, personally I'd rather own stocks which not only have attractive yields but that also have the potential for substantial earnings growth in the coming years and are available at what appear to be very reasonable prices.
Here are three such stocks which I've got my eye on.
- Toll Holdings Limited (ASX: TOL) is a company well worth considering given its leverage to improving economic conditions both here in Australia and in its overseas operations. The stock is trading on a forecast (provided by Morningstar) FY 2015 price-to-earnings (PE) ratio of 13.4 and a fully franked dividend yield of 5.3%.
- AMP Limited (ASX: AMP) has been out-of-favour with many investors in the recent past after experiencing difficulties within its insurance division. With those issues hopefully now under control, the stock looks appealing on a forecast PE of 14.4 and a yield of 5.1%.
- Macquarie Group Ltd (ASX: MQG) looks to be a great alternative to the banks with enormous growth prospects ahead of it. The investment bank is trading on a forecast PE and yield of 14.8 and 4.9% respectively.