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5 dividend stocks that smash term deposits

It seems like forever ago when you could sit back and watch your nest egg grow 3-5% every year, knowing all the while it was safe in the bank. Those days are gone.

Interest rates are only 2.5%, which means by the time you factor in inflation, tax and account fees, there’s an outside chance that some term deposits could be costing money.

I’m not saying depositors should rush out and dive straight into stocks or property because they appear to be yielding exceptionally well, but I am saying that I haven’t heard of a term deposit that will pay you 8% plus a tax credit. However one of these stocks does just that.

5stocks

Source: Google Finance

Metcash (ASX: MTS) is my favourite income idea on the S&P/ASX 200 (ASX: MTS) at current prices. It’s a great long-term stock and, if bought at the right price, could also be considered for its potential growth. At current prices, it pays an 8% dividend and trades on an earnings ratio of just 13, which begins to look extremely cheap if you compare it to other investments like property or term deposits.

Unlike other yield plays its share price hasn’t skyrocketed because investors are worried about competiveness with its two much bigger competitors, Coles and Woolworths. However, when the market is fearful perhaps it’s time to move in for a bargain.

Similarly to Metcash, David Jones (ASX: DJS) and Myer (ASX: MYR) have sent some investors running for the hills but with dividend yields at 5.9% and 7.2%, respectively, and a low interest environment slowly scratching back some confidence in the retail space, I don’t think they’ll last long at current prices either.

Strong companies that may have hit a rough patch for one reason or another can present investors with some great prices. For that reason both Cochlear (ASX: COH) and Leighton Holdings (ASX: LEI) could be attractive buying opportunities. Both companies recently announced profits of more than 100% year-on-year and at current prices they pay dividends of 4.3% and 5.5% respectively.

Foolish takeaway

When buying stocks, it’s important to remain objective to the history of the company because we are buying it based on future prices not on its past performance. With interest rates so low, money in term deposits is earning less and less. For investors willing to take a little extra risk they can grab a hold of some great dividend yields and companies that are fairly valued.

These 5 stocks have huge dividends but if you’re interested in the Motley Fool’s number 1 dividend idea for 2013-2014, simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Owen Raszkiewicz owns shares in Cochlear, Metcash, David Jones and Myer.

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