3 great dividend stocks for the beginning investor

With capital growth never certain, investors – novice or experienced – can do much worse than lock in some good dividends with these three businesses

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A generous dividend is all well and good, so long as the company sticks around long enough to keep paying it out, but that's never a given. In that spirit of realism let's look at three companies with strong yields that look like they're going to be around awhile.

Each of our three companies will be consumer-facing, so the business models will be easy to understand. Each will be a strong performer in its market space that can make, market, and distribute its products with machine-like efficiency. And each will be a profit-making dynamo, producing goods that people need to buy over and over.

Without further ado:

1. Woolworths Limited (ASX: WOW)

Where better to start a list of 'repeat purchase' businesses than the place many of those purchases actually happen.

The grocery, liquor, discount department store and hardware behemoth covers the waterfront of consumer spending, and is on track for an annualised sales figure of close to $50 billion. Not bad for a business that started life with a single store in 1924 and didn't open its first supermarket until the 1960s. It's hard to go into a shopping centre or drive for more than 10 minutes in metropolitan centres without seeing a Woolworths supermarket, Big W department store, BWS bottle shop or Woolworths Petrol canopy. The same now applies to our trans-tasman cousins, with Woolworths now a strong player in New Zealand.

The food and liquor businesses are still the powerhouse of the company and despite growth trailing arch-rival Coles (owned by Wesfarmers Limited (ASX: WES)), Woolworths is still the larger of the two retailers and makes the best margins. When it's time to restock the pantry, odds are you'll end up in a Woolies store.

With a 4.8% fully franked trailing dividend, you're being well compensated for an investment in the ultimate in must-have shopping destination.

2. NIB Holdings Limited (ASX: NHF)

Private health insurers have been in the news quite a bit recently with the federal government securing support from the cross-benches to means-test the private health insurance rebate.

While that change is likely to have some impact on health insurers such as NIB, the company's best estimates are that only 0.6% of policy-holders will drop their cover and another 2.3% may reduce their level of cover. These are quite small impacts, and NIB expects to more than offset this loss with organic growth.

The business is performing very well, delivering revenue and profit growth, and increasing its return on shareholders' equity from just under 15% to 18% in the most recent half year (on an average basis).

While not a business many people think of as a repeat business, consumers' inertia to change health funds once they have selected one, and the regular monthly contributions make health insurers one of the ultimate in repeat-purchase businesses.

NIB is currently trading on a trailing dividend yield of 9% fully franked. The level of dividends may come under some pressure if the company's estimates of the impact of means-testing are proven to be optimistic, but the current yield leaves plenty of breathing space, and the company has made clear its intention to continue to return funds to shareholders in the absence of better uses for the company's cash.

3. Telstra Corporation Limited (ASX: TLS)

Other than perhaps BHP Billiton (ASX: BHP), Telstra has likely garnered more column-inches of newsprint and online space than any other ASX company. Between the politics of the privatisation and now structural separation, and the fate of shareholders who bought shares in each of the three tranches, Telstra hasn't suffered for wont of attention.

Anchoring – or fixating on some previous price or turn of events – can be a costly investment mistake. Many investors still remember Telstra at $7.00, and are still licking their portfolio wounds. Bygones must be bygones, however – and fresh eyes are needed.

With the issues of structural separation and the NBN now behind it, Telstra can get on with life as a reseller of NBN services, and operator of its increasingly popular 3G and 4G mobile networks. David Thodey and his team are doing a good job of turning Telstra into a consumer-facing retail company, completing the move away from decades of what was essentially infrastructure provision.

The worst of Telstra's corporate performance – and share price falls – are likely behind it. You should never say never, but the future should be brighter than the past.

Telstra is currently offering a fully-franked 8.5% dividend yield – and while the dividend was previously being paid from borrowings, the free cash that the business is generating is putting the dividend on a much more sustainable trajectory. Again, there are no guarantees, but the Telstra board understand their constituency well.

Foolish take-away

With capital growth never certain, investors can do much worse than lock in some good dividends with these three businesses. Especially for beginners, but essentially for all of us, a solid, healthy dividend stream is a tax-effective way to receive investment gains from these companies, and provide us the opportunity to reinvest those dividends in the months and years to come.

If you are looking for ASX investing ideas, look no further than "The Motley Fool's Top Stock for 2012." In this free report, Investment Analyst Dean Morel names his top pick for 2012…and beyond. Click here now to find out the name of this small but growing telecommunications company. But hurry – the report is free for only a limited period of time.

Scott Phillips Is The Motley Fool's feature columnist. Scott owns shares in Woolworths and Telstra. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »