We Australians love our dividends…
And why wouldn't we?
After all, dividends over 5% are easily obtainable. And when they come with franking credits, low tax rates inside superannuation accounts and the chance of capital gains… it's easy to see why.
However, investors chasing high dividend yields need to be very careful.
Stock prices go both ways and directors can choose to withhold dividends if they please. So being able to identify companies which will make the best income ideas in future years, is not easy.
However, focusing on companies with strong track records for shareholder returns, competitive advantages and big balance sheets is a great place to start. Here are four ASX companies with those characteristics.
1. Insurance Australia Group Ltd (ASX: IAG) is the name behind brands such as CGU, SGIO, NRMA and more. Not only does IAG boast extremely profitable operations in local markets, it is also expanding into Asia through joint venture partnerships. It is expected to yield a dividend of 5.88% in the next year (8.4% grossed-up).
2. National Australia Bank Ltd (ASX: NAB) is Australia's biggest bank by assets. Despite its troublesome foreign exposure, NAB has achieved an average annual total shareholder return of 7.8% over the past decade. Given its relative underperformance, NAB trades on the lowest valuation multiples of the big banks and has a dividend yield of 6.1% fully franked (8.7% grossed-up).
3. Woodside Petroleum Limited (ASX: WPL) is our biggest independent oil and gas company. Its share price has suffered in recent months, as the oil price continued to fall. However this has forced up its dividend yield and if its share price falls any further it could prove a buying opportunity for long-term investors. Analysts are forecasting a 6.4% fully franked dividend yield (9.2% grossed-up).
4. Telstra Corporation Ltd (ASX: TLS) is a favourite Australian dividend stock. Its enviable free cash flows and dominant position in the domestic technology and telecommunications market enable it to pay huge dividends whilst also investing in new growth areas. It is forecast to pay a 5.2% fully franked dividend (7.4% grossed-up).
Buy, Hold, or Sell?
Despite offering big dividend yields, none of these four companies appear to be compelling value today. Whilst I expect each to be more profitable in the years ahead, only Woodside and IAG are hovering near a price I'd be willing to pay for their shares. In my opinion, investors should wait for lower prices before hitting the buy button.
