"If there is one thing Australian investors love more than dividends it is franked dividends. Or fully franked dividends."
That was The Australian Financial Review, back on 1 July 2014.
Although the financial media has been known to exaggerate trends or economic realities, this may actually have been one gross understatement.
Quite often, the dividend offered by a company is the first thing that an investor will look for when making an investing decision. Sometimes, it's the only thing that an investor looks at.
Right now, I believe that's reflected in the hot pursuit for shares in Australia's big four banks. Despite their exuberant valuations and the prospect of slowing growth, greater financial regulation and slimmer net interest margins (a measure of profitability on their loans), investors are still being lured towards them.
In fact, Commonwealth Bank of Australia (ASX: CBA) hit a record high just last week as it threatened to break through the $86 mark for the first time in history. It maxed out at $85.85.
So why are investors still so attracted to the banks?
You guessed it: It's largely because of their lucrative fully franked dividend yields. Admittedly, they are far more attractive than the returns from term deposits in this low interest rate environment, but the shares themselves are by no means a bargain.
Avoid this investing danger
Make no mistake, each of the big four banks are great businesses, but that doesn't make them great investments right now.
In fact, investors who buy them today could be committing themselves to years of underperformance – particularly if the banks are forced to raise more capital – a move which would not only impact their return on equity, but also their dividends over the coming years.
Investors should never make a decision based solely on a company's dividend yield. While it might pay off in the near-term, it can have painful financial consequences in the longer-haul.
2015: The year of the dividend
While high-yield dividend stocks have played a key role in driving the Australian share market higher in recent years, they could really get firing in the New Year.
Especially if, as analysts are starting to expect, the Reserve Bank cuts interest rates even further. While some are anticipating rates to be cut as low as 2%, there's no reason to say they won't fall even lower than that…
If that scenario plays out, you can expect investors to swarm towards Australia's high-yielding stocks.
But I don't expect it will be the usual suspects that benefit. With stocks of the big four banks and Telstra Corporation Ltd (ASX: TLS) trading at high premiums, I expect some of Australia's other dividend stocks to truly fire up.
Woolworths Limited (ASX: WOW) or Insurance Australia Group Ltd (ASX: IAG) are two perfect examples of stocks that could take off in 2015. While the market has currently lost patience for Woolworths, its forecast 4.8% fully franked yield could have investors rushing back in hoards. Meanwhile, Insurance Australia Group offers a delicious 6.1% fully franked yield, which could be just too good to refuse.
I also think RCG Corporation Limited (ASX: RCG) and JB Hi-Fi Limited (ASX: JBH) could become quite popular amongst investors. While the two retailers are trading at compelling prices, they also offer fully franked yields of 7.1% and 5.5% respectively.
Don't miss The Motley Fool's top dividend stock for 2015
