BHP Billiton — the surprising fully franked dividend play

It’s not just me who’s banging the drum on the attractiveness of fully franked dividends.

An AFR article titled “Changing to please the SMSF crowd” says businesses are increasing dividends to appease yield-hungry self-managed investors.

Somewhat belatedly, and in greater numbers than ever, it seems investors are finally realising low interest rates are here for the foreseeable future… all of which makes dividend paying stocks, by comparison, look very attractive, especially of the fully franked variety.

What investors haven’t quite realised yet is, according to one high-profile investment house, the ASX could be set up for a very strong second-half to 2014. More on that a little further on…

The same AFR article mentioned above quoted BT Investment Management’s Crispin Murray as saying…

“They want franking credits, yield and don’t want to worry every day about what the iron ore price is…”

It was only recently Scott Phillips and Andrew Page released their brand new feature Income Extra, exclusively to Motley Fool Share Advisor subscribers, where they listed their top five dividend stocks from the Motley Fool Share Advisor scorecard.

Not surprisingly, given their dislike of the sector, and the average dividend yield of 5.2% — 7.2% when grossed up for franking credits — there wasn’t a single resources stock amongst their top five.

But maybe not for much longer…

The AFR reports Woodside Petroleum (ASX: WPL) is looking more like an income play every day, with analysts predicting a forecast dividend yield of 5.9%.

The same publication quotes David McDonald, head of investment strategy, Australia, at Credit Suisse as saying BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) offer long-term appeal, going on to say

“These companies have reduced capital expenditure and lowered their cost bases…. they are now starting to offer attractive dividends as they look to return excess cash to shareholders.”

You could have run me over with a row of Caterpillar mining trucks.

mining trucks

With the iron ore price trading below US$90 a tonne, here was a major investment house naming these capital intensive mining behemoths as dividend stocks.

BHP Billiton trades on a fully franked forecast dividend yield of 3.65% — or 5.2% when grossed up for franking credits — and forward P/E of around 12 — not too shabby at all.

It has certainly got me interested in the Big Australian again… and I already own the stock.

Lucky we’re not worrying every day about the iron ore price then, huh? An investment in BHP Billiton today is a case of just sitting back and enjoying the fully franked dividends.

The same can’t be said about an investment in Fortescue Metals Group (ASX: FMG).

The AFR reports the “third force in iron ore” is offering big discounts to Chinese steel mills as it attempts to move its low-grade red dirt.

At these prices, Goldman Sachs analyst Craig Sainsbury estimates Fortescue is making just $15 a tonne, but that is before tax and interest payments.

Sounds to me like a tough way to make a buck. Shifting all that dirt to pocket just a few dollars per tonne.

This year, Fortescue is expected to produce more than 150 million tonnes of low grade ore, up from 60 million two years ago.

In the face of a plunging iron ore price, no wonder then one un-named analyst said “they’re killing their own market.”

Moving on to altogether more attractive hunting grounds, the aforementioned David McDonald expects the S&P/ASX 200 index to reach 5,800 by the end of the year, representing more than 7% upside from current levels.

With the end of financial year (EOFY) just around the corner, and with investors seemingly sitting on the sidelines waiting for “something” to happen, it’s a timely reminder that investors need not be overly wary of investing in the stock market.

Yes Foolish readers, the death of the bull market has been greatly exaggerated.

Add in some of those juicy fully franked dividends, and the second half of 2014 could see investors and SMSF funds turn in very attractive returns — especially when compared to those on offer in term deposits.

In the coming days and weeks I’ll certainly be putting more cash to work — plonking some dollars down on a couple more Motley Fool Share Advisor recommended stocks that I’ve had my eyes on for some time, and also seriously considering throwing some more cash at BHP Billiton.

You’ve got to be in it to win it, Foolish readers.

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Of the companies mentioned above, Bruce Jackson has an interest in BHP Billiton, ANZ, Commonwealth Bank and Westpac.

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