Many investors prefer to primarily invest in companies within the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). A focus on building a portfolio comprising stocks which are amongst the biggest is certainly understandable; the benefit of larger and more stable stocks is particularly obvious during times of heightened volatility. For example, while in the past five days the S&P/ASX 200 Index has fallen 1.2%, the S&P/ASX Small Ordinaries (Index: ^AXSO) (ASX: XSO) has fallen by 2.1%.
Limiting your investment universe to the largest 200 firms doesn’t mean you have to own defensive dividend payers such as Telstra Corporation Ltd (ASX: TLS). While Telstra admittedly offers a uniquely stable dividend and a 5.7% yield, foregoing some of that stability can allow for significantly higher yields to be attained.
To find the following five stocks, I began with the S&P/ASX 200 constituents and then narrowed the selection down to stocks that met the following criteria:
1) paid fully franked dividends in the past 12 months
2) produced earnings which fully covered their dividends
3) are trading on analyst consensus forecast dividend yields of over 6.5%
Here are five stocks which met the above criteria and could make good additions to a portfolio aiming to achieve above average after-tax dividend income:
- NRW Holdings Limited (ASX: NWH): 7.6%
- Wotif.com Holdings Limited (ASX: WTF): 7.4%
- Myer Holdings Ltd (ASX: MYR): 7.2%
- Monadelphous Group Limited (ASX: MND): 6.9%
- Southern Cross Media Group Ltd (ASX: SXL): 6.8%
Investing involves trade-offs. Some investors choose to focus on growth stocks to achieve capital gains rather than income stocks which will provide dividends. For investors keen to benefit from franking credits and who first-and-foremost are looking to earn a reliable income stream from their investments, then dividend-paying stocks are their focus.
The trade-off from high yields is generally low growth, however by adding some companies that are not the “blue-chips” to your portfolio – such as the above five – you could not only enjoy a higher yield but also potentially a higher growth rate.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.