It seems as though income stocks are the place to be for Aussie investors. After all, interest rates are on their way down, making cash a less attractive investment. Furthermore, negative gearing provides evidence as to just how expensive property has become – especially on the east coast, while bonds may not be such a great idea if lower interest rates spur inflation on to a higher level, which erodes the real terms value of fixed income coupons.
Clearly, not all stocks offering high yields are worth investing in. Moreover, are the dividends offered by these three stocks likely to be sustainable? And, are they still cheap enough to offer considerable capital gains, too?
National Australia Bank Ltd.
Shares in National Australia Bank Ltd. (ASX: NAB) have kept pace with the ASX since the turn of the year and are up 6% year-to-date. As such, they continue to trade at a sizeable discount to the wider index, with them having a price to earnings (P/E) ratio of 14.4 versus 16.8 for the ASX. And, while sentiment may be somewhat subdued in the short run due to the placing that NAB is currently in the midst of, its yield of 5.5% (fully franked) remains enticing and well ahead of the ASX's yield of 4.4%.
Looking ahead, NAB is expected to increase its bottom line at an annualised rate of 15.1% during the next two years. This should allow it to increase dividends per share, with them due to rise by 3.5% per annum during the same time period, thereby putting NAB on a hugely appealing forward yield of 5.9%.
Woolworths Limited
One of the challenges for all investors is deciding which companies can afford to pay their current level of dividends. In other words, the yield may be appealing, but is it sustainable? This is particularly relevant for Woolworths Limited (ASX: WOW), which is enduring a tough period, with it being squeezed by lower cost operators such as Aldi and Costco.
However, Woolworths has a very sustainable dividend, which means that even if profit falls somewhat moving forward it should be able to afford its current shareholder payouts. Evidence of this can be seen in Woolworths' dividend coverage ratio of 1.43 and, with its yield being 4.8% (fully franked), its price to sales (P/S) ratio of 0.58 looks more appealing when compared to the ASX's P/S ratio of 1.64.
Super Retail Group Ltd
Although Super Retail Group Ltd (ASX: SUL) currently offers a lower yield than the ASX of 3.7% (fully franked), it has a superb track record of dividend per share growth. For example, during the last 10 years it has increased dividends on a per share basis by 23.2% per annum. This has been possible as a result of the company's excellent improvement in cash flow during the same period, with it having risen by 42% per annum since 2005.
And, looking ahead, Super Retail looks set to benefit from a lower interest rate, with its bottom line forecast to rise by 8.4% per annum during the next two years. This, combined with a P/S ratio of just 0.97, indicates that it is a great time to buy a slice of it.
