No wonder these ASX picks are so popular, writes The Motley Fool.
Here at the Motley Fool, high-yield dividend shares are a firm favourite. To be sure, oil and mining stocks and small caps have their fans, too. But, undeniably, the charms of high yield dividend stocks have perennial appeal.
Yet it's safe to say that some investors look down on high-yield shares as, well, boring. There's none of the excitement of a racy oil explorer, they smirk.
Where's the thrill, they ask, in buying into a blue-chip such as Woolworths Limited (ASX: WOW), Telstra Corporation (ASX: TLS) or Westpac Banking Corporation (ASX: WBC) and then simply sitting back and just banking the dividends?
Well, that's true, high-yield blue chips aren't exciting. Despite this, we reckon that there are no fewer than five compelling reasons for buying high-yield shares. And, yes, excitement isn't one of them.
1. Income
First and foremost, of course, there's that glorious yield. Just think: 8% or so, fully franked, at a time when the RBA cash rate is 3.75%.
You don't want to chase yields too high, of course. Very high yields may indicate a share price that's been driven down by worries over dividend sustainability, or other concerns. David Jones (ASX: DJS) might be an example of this, for instance, and Myer Holdings Limited (ASX: MYR) has recently cut its dividend payout.
2. Capital gains
Often, yields are higher than the ASX average because shares are temporarily beaten down by short-term concerns over something or other. JB Hi-Fi (ASX: JBH), for instance, is firmly into high-yield territory for just such a reason. Macquarie Group Limited (ASX: MQG) is another example.
If and when these concerns dissipate, and the share price rises again, investors find themselves in the happy position of have locked in a high income — and a decent capital gain.
3. Total returns
Time and again, studies of the sharemarket's total return over long periods show that something between two-thirds and three-quarters of overall returns come from dividends.
Not dividends turned into income and spent, of course, but dividends reinvested in more dividend-earning shares.
No wonder dividend reinvestment plans (DRPs) in high-yielders such as Commonwealth Bank of Australia (ASX: CBA) have performed so well over the years.
4. Blue-chip security
In the nature of things, some of the ASX's fattest and tastiest yields are in the upper reaches of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
No fast-growing minnows, these are big companies — think Australia and New Zealand Banking Group (ASX: ANZ), Wesfarmers Limited (ASX: WES) and Westfield Group (ASX: WDC) — with robust business models and a long-term sustainable stream of profits.
Granted, they're not going to 10-bag overnight; but, equally, they're not going to go pop, either.
5. Rising dividends
Buy a corporate bond — or any other fixed-interest investment, such as a term deposit — and you know to the cent what you're going to earn.
Many high-yield shares have an enviable track record of not just paying a decent dividend but increasing it over time, too, and at a rate that's comfortably above inflation, as well.
The result? A decent income, and an income that is rising in real terms, too.
If you're looking in the market for some high yielding ASX shares, look no further than "Secure Your Future with 3 Rock-Solid Dividend Stocks". In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.
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A version of this article was originally published on Fool.co.uk
