Want dividends over 10%? Try these…

Since the Reserve Bank of Australia began cutting interest rates in November 2011, investors have slowly but surely been making their way into equities and, most recently, into property. The interest rate has hit a low not seen for many years and has made the dividends of many Australian companies look more and more enticing.

Forget companies in S&P/ASX 20 (ASX: XTL), their run-up in price back in May proved to investors how overinflated their prices can get when investors flock from term deposits. Instead, investors could look for value in mid-sized stocks in the S&P/ASX 200 (ASX: XJO) (^AXJO) that the market has passed up. Here are three stocks that yield fantastic dividends and could be considered undervalued.

Yielding a huge 7.8% fully franked dividend (over 10% when grossed up) is Metcash (ASX: MTS). The diversified retailer has provided stable dividends to investors for a number of years. Despite heavy competition from its rivals Coles and Woolworths, Metcash’s flagship IGA and Foodworks supermarket enabled the group to a 6.9% underlying PAT in its full-year ended 30 April 2013. With a handsome dividend and solid growth, Metcash deserves a spot on the watchlist.

Mining services have taken a beating – or so we thought. Yesterday, mining services company Bradken released a strong full-year report that sent investors off like rockets to buy exposure in the sector. Despite the uncertain outlook from FY14 onwards, investors are buying up seemingly cheap stocks.

Ausdrill (ASX: ASL) is the mining stock I’ve chosen to add to my portfolio. After gaining significantly in the past week its price to earnings ratio has risen to 4. Yes, it could very well still be undervalued and with the increasing likelihood that it will pay a dividend around 10% fully franked (around 13% when grossed-up), it might be worth the risk.

The last stock on the list is Myer (ASX: MYR) and although its dividend, when grossed-up, is a measly 9.5%, its valuation is appealing to income and value investors. With retail supposedly down in the doldrums, now could be a good time to cash in.

Foolish takeaway

Investors need to be sure that dividends are sustainable because history doesn’t always repeat itself. Look for companies that boast healthy balance sheets and pay dividends from cash rather than debt is a must. These three stocks are great yield plays but they are certainly not without their risks.

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Motley Fool contributor Owen Raszkiewicz owns shares in Metcash, Ausdrill and Myer. 

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