Despite concerns over a slowing economy, Australians have dividend-paying shares caught in their crosshairs.
Of course, there are risks. But when you're weighing up a 6% dividend yield versus a 3% return from term deposits, it seems like a no-brainer: buy shares!
However, successful sharemarket investing involves more than just identifying the stocks with the largest dividend yields.
Indeed, investors must be mindful that a 10% fall in share price would quickly wipe-out the perceived benefit of a 5% dividend return.
In this Fool's opinion, focusing on the health of the underlying business and investing for the long term (five years or more) is the only way to generate a reliable income stream from the share market.
Three of the most popular dividend stocks on the ASX right now are Telstra Corporation Ltd (ASX: TLS), Medibank Private Ltd (ASX: MPL) and Australia and New Zealand Banking Group (ASX: ANZ)
Let's take a quick look at each and see which, if any, are right for your portfolio…
Australia and New Zealand Banking Group
ANZ's shares are currently trading on a forecast dividend yield of 5.61%, fully franked. ANZ is the only 'Big Four' bank actively seeking to compete and grow throughout Asia. In its most recent half year report, ANZ drove roughly 20.2% of group profits from key overseas markets. It is also a very profitable lender in the local market, allowing it to boast a return on equity of 14.7% and net interest margin of 2.04%.
However, as I noted here, ANZ's profits will still suffer in the event of slowdown in the local economy as demand for credit drys up and banks are forced to lower profit margins to compete.
Medibank Private
Despite its strong and well-documented start to life as a publicly-listed company, Medibank's shares have actually underperformed the broader market by around 7% since it first began trading on the ASX in late 2014. Although it delivered on many of the forecasts it set out in its IPO prospectus, shares of Australia's leading private health insurer continue to trade at an expensive valuation.
Currently at a price-earnings ratio of 24.5 times and price-book ratio over 4.2 times, investors would be wise to exercise caution before hitting the buy button.
Telstra
Telstra is undoubtedly a great company to own for dividend income. It has a strong track record for generating large cash flows and paying great dividends, but as I recently highlighted here, the 100% rally in Telstra's shares over the past five years hasn't been matched by an equivalent increase in the telco's profits. Therefore, investors are likely paying up for future growth or dividends ahead of time.
Whilst Telstra's Asian growth strategy bodes well for future returns, I'd advise investors to wait for a lower entry price before starting a position.
Should you buy, hold, or sell?
