Those seeking regular dividends from the share market should focus their attention on companies with durable competitive advantages, not necessarily those with the biggest dividend yields on offer right now.
That's because no matter how much we'd like to think we can, it's impossible to know which stocks will be the best dividend payers in five or 10 years' time.
To put the odds in our favour, it's important to find companies whose services aren't easily replicated or disrupted by competition.
This competitive advantage must be kept by management who are willing to reinvest capital into new projects to keep their dominance alive. This is how a competitive advantage becomes durable.
Telstra Corporation Ltd (ASX: TLS) is the perfect example. It's a well-known fact that its mobile plans are more expensive than its rivals. Even still, consumers are willing to pay-up for better reception and service.
With stronger profit margins than its peers Telstra can generate reliable cash flows which will be used to pay its dividends and reinvest in new businesses, which in turn maintain or grow its dominance in new and existing markets.
As a contrary example in recent years we've seen how the big four banks' profit margins have come under threat as mortgage brokers, regional banks and savvy property owners put pressure on them to offer more competitive rates. Regulation has also played a part in margin erosion.
After nearly going bust in the early 1990s, Westpac Banking Corp (ASX: WBC) thrived off its wide net interest margins. Then, during the early 2000s and Global Financial Crisis, it sought to grow profits by consolidating the market with timely acquisitions.
However, looking ahead, the economy as well as the exorbitant growth rate of property prices in Australia's major capital cities is tipped to slow. Whilst Westpac's push into wealth management bodes well for growth over the long term, it's unlikely to provide the profit increases necessary to justify the banks' current valuation.
3 dividend stocks to buy before Westpac
Here are three dividend stocks I'd buy before Westpac…
- APA Group (ASX: APA) is Australia's largest natural gas infrastructure business, with over $12 billion of assets. Whilst its share price has run hard in recent times, investors could look to buy the stock on any meaningful pullback in price or slowly build a position over time.
- Coca-Cola Amatil Ltd (ASX: CCL) has been a contentious investment in recent times, as Australia's distributor of Coca-Cola and Beam-branded products suffered through a number of profit setbacks. Nevertheless the worst appears behind it with management eying a return to growth in the near term.
- Woolworths Limited (ASX: WOW) has also fallen hard in recent times, down 22% over the past year, as concerns over competition in Australian supermarkets and losses from its Masters Home Improvement business soured investor confidence. However, Australia's most profitable grocery retailer continues to reinvest in itself and has a reputable track record for paying fully franked dividends.
