Even after the recent rally, the S&P/ASX 200 index is still down 7% from its April 2011 highs. We’ve had the possibility of the U.S. losing its sacred triple-A credit rating, the European debt crisis, and a series of poor economic data points at home and abroad, just to name a few of the market’s worries.
This pullback does make some stocks appear compelling from a dividend yield viewpoint. The major banks, National Australia Bank (ASX: NAB), Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC) and ANZ (ASX: ANZ) are now all yielding around 6%. Take into account the fully franked nature of their dividends and they have even more attractive yields.
But investors shouldn’t just chase yield for the sake of it. The banks have some question marks over them. The cooling housing market and sluggish to falling credit growth raises some concerns about their ability to fund future dividends. That said, people with an investing horizon that can be counted in years rather than days, may see through the short-term economic woes and see today’s dividend yields as being tempting.
Yield on Cost
While the banks are yielding quite well right now, they may not have the future growth prospects of other companies. You may be better searching for companies with good dividend growth rates that will hopefully become high yield shares over time, based on your initial cost.
Austin Engineering (ASX: ANG) and Ansell (ASX: ANN) are two that might fit the bill. Austin has a 3 year dividend growth rate of over 30% while Ansell’s 8% growth rate is nothing to sneeze at. Who would decline an 8% pay rise?
Neither company is trading on a particularly high dividend yield today, but the goal here is to have your yield-on-cost rise each year as the dividends grow, creating some high yielding shares in your portfolio over time.
Diversification from the Australian Dollar
Getting dividends from Aussie shares is a nice little earner. However, with the Australian dollar riding high compared to its historical norms, this could provide an excellent opportunity to acquire some international blue chips.
There is no denying though that an opportunity to acquire global titans like Johnson & Johnson, 3M and IBM is one worth considering.
3M was trading around $US120 in early June 2001 with the AUD/USD rate around 50c, so the total cost in local currency was $A240 per 3M share. Fast forward to now and 3M is trading around $US95 and the AUD/USD rate is $1.07, so the local currency cost per 3M share is just $A89 per 3M share. Needless to say that is a big difference from the $A240 cost of a decade ago.
Pay cheque from abroad anybody?
The aforementioned blue chips also pay regular dividends. If the strong Aussies dollar loses steam then you‘ll see a juicer dividend cheque come through the door. A fall in the forex rate may also lead to a possible or even amplified capital gain when you decide to sell these international shares.
This strategy does force you to take a view on the forex rate and adds currency risk to your portfolio. The diversification benefits, however, shouldn’t be overlooked. Having U.S. or any international shares adds currency, geographical and sector diversification to your portfolio. This diversification is especially valuable given the resource and material sector dominance of the Aussie share market.
The current opportunity to acquire international blue chip stocks at these favourable exchange rates is worth considering and with the financial year just ended, perhaps it’s adding a New (Financial) Year’s Resolution to your list?
Fool contributor Mark Tobin does not own any of the shares mentioned in the above article. Mark works for Wilson Asset Management, and that firm or its clients may own any of the shares mentioned above. These positions can change at any time. The Motley Fool has a fine disclosure policy.