If you're investing in the share market, there are two ways to make money:
- Capital growth – when you bet on share prices going up or down
- Income – usually, in the form of dividends
Later in life, when capital preservation is paramount, income becomes the primary goal of most investors.
And while shares are undoubtedly riskier than other assets like fixed income (term deposits, bonds, etc.) and some alternative investments, they do offer larger potential returns than most asset classes.
For example, the interest on a 'high yield' interest account with a major bank currently sits around 2.4%, but the following three shares are expected to pay dividends of more than 5% (with full franking!).
Retail Food Group Limited (ASX: RFG)
Retail Food Group is tipped to pay a fully franked dividend of 30 cents per share in the coming 12 months – equivalent to a fully franked dividend yield of 5.3%. Retail Food Group is the owner of brands such as Gloria Jean's, Pizza Capers, Crust Pizza, Donut King and more.
Telstra Corporation Ltd (ASX: TLS)
Telstra is a very popular income share because its products are considered staples in the modern, interconnected, world of technology. Being an industry leader it generates enviable profit margins and cash flows. Telstra shares are forecast to pay a dividend equivalent to 6.1% fully franked.
National Australia Bank Ltd. (ASX: NAB)
National Australia Bank shares are forecast to pay a dividend of 7.4% fully franked. If you are eligible to receive those tax-effective franking credits, the dividend yield blows out to more than 10%! NAB shares have come under pressure in recent months as concerns over regulation and competition come to the fore. However, the downward moving share price has boosted its dividend yield.
Foolish takeaway
You should never buy a company only for its dividend yield. Because markets are said to price shares semi-efficiently (meaning most investors have a rough idea of what a share is worth), a higher-than-expected dividend yield may be a cause for concern. For example, we noted that NAB's share price has fallen as a result of perceived risks to its profits.
Before you buy any dividend share, consider the upside potential and the downside risks.
