With the board of the Reserve Bank of Australia (RBA) deciding this week to hold rates steady at the ultra-low 2% level, investors will still continue to seek out high dividend-yielding stocks which can generate a sustainable income.
In this low interest rate environment, the demand for blue-chip stocks with solid yields is likely to continue.
An appealing income stock requires a number of traits. Firstly, a stock trading at a fair price is important as purchasing an overpriced stock could mean all the gains from dividends may be unwound from capital depreciation. Secondly, the dividend needs to be sustainable (and ideally growing) for the purchased yield to equal the actual yield achieved.
The following three stocks are widely held and are generally considered blue-chip, however, their suitability as income-generating stocks is worth considering.
AMP Limited (ASX: AMP) – according to Thomson Consensus Estimates by financial year (FY) 2017 the group should be earnings 42.1 cents per share (cps). Based on a pay-out ratio of 75%, the insurer would be paying a dividend of 31.5 cps. That implies a forward price-to-earnings ratio and dividend yield of 15.3x and 4.9% respectively.
Origin Energy Ltd (ASX: ORG) – while Thomson's numbers forecast a dramatic rise in earnings per share out to FY 2017, expectations for the dividend are much lower with the forecasts showing the dividend remaining steady at 50 cps. Based on these estimates, the stock is trading on a FY 2017 PE and dividend yield of just 7.8x and 4.5% respectively.
Woolworths Limited (ASX: WOW) – the concerns of investors surrounding increased competition within the domestic supermarket industry and the effect this could pose to Woolworths' earnings are becoming increasingly well understood. Based on Thomson's figures, the company is forecast to earn 163.6 cps in FY 2017 and assuming the group can raise its dividend pay-out ratio to 85% as consensus suggests, then the stock is also offering up a forward yield of 4.9% while trading on a PE of 17.3x.
For long-term conservative investors, all three of the above stocks hold some appeal. Given the low pay-out ratio of Origin Energy, coupled with its low PE ratio, this is arguably the most appealing of the three stocks discussed above.
