With interest rates at historic lows and predictions for further rate cuts over the next 12 months, many investors will be looking for ways to boost their income in assets other than cash.
This is especially the case for SMSF investors and investors who are now rolling over old term deposits and realising they will be receiving virtually no return after taking into account taxes and inflation.
Sure, your capital is guaranteed in cash investments and it is prudent to keep a portion of your portfolio in cash, but there remains excellent opportunities in the equity market to build wealth through capital gains and growing dividends.
Although it can be tempting to invest in stocks based on their historical dividend yield, investors need to select stocks based on the company's overall health. There are countless examples of companies needing to cut or even cease dividend payments when times get tough – these are stocks that need to be avoided!
So with these points in mind, here are some dividend-paying stocks that might appear attractive to some investors:
WAM Capital Limited (ASX: WAM) – WAM is a listed investment company managed by Wilson Asset Management that provides investors exposure to an actively managed diversified portfolio with the primary objective of delivering investors a growing stream of fully franked dividends, while providing capital growth and preserving capital.
The fund has a strong track record of outperforming the broader market and over the last financial year outperformed the S&P/ASX All Ordinaries Accumulation Index by 9.0%.
At the current share price, investors can expect to receive a fully franked dividend yield of around 7% and at the same time receive exposure to one of Australia's best performing domestic fund managers.
Folkestone Education Trust (ASX: FET) – Folkestone Education Trust is an externally managed childcare REIT owning about 345 properties in Australia and 51 in New Zealand. Unlike childcare operators, Folkestone is purely a property owner and does not operate the underlying childcare businesses. This has proven to be a highly successful strategy for the company and has generated returns for shareholders in excess of 42% annually over the past five years.
The continuing strong demand for childcare services should see occupancy levels in its properties remain high along with significant opportunities for further growth thanks to a strong pipeline of new properties that will be constructed over the next couple of years.
As the graph below shows, Folkestone has a strong track record of increasing its distributions each year and this is excepted to continue in FY16.
Source: Company Presentation
Based on the current share price of $2.07, investors will receive an unfranked dividend yield of nearly 6.5%.
Retail Food Group Limited (ASX: RFG) – The share price of Retail Food Group has rebounded more than 16% over the past two weeks following a period of relentless selling. The market reaction to a possible slowing of the domestic economy and the impact this could have on a company like Retail Food Group has been overblown in my opinion.
The company's most recent full year result delivered earnings per share growth of more than 34% along with a positive earnings outlook for the year ahead. The company has a strong pipeline of new store openings both domestically and internationally.
Retail Food Group provides investors with a unique opportunity to gain exposure to a company that can provide both growth and income. The shares are trading on a forward price-to-earnings ratio of just 11 and at the same time investors can expect to receive a fully franked dividend yield of 5.6%.
