You probably know it by now but interest rates are low. Australia’s current cash rate is stuck at 2.5%. This is far from ideal and any savvy investor is right to be apprehensive about investing in term deposits or savings accounts at today’s rates.
But if you’re waiting for interest rates to start climbing higher sooner rather than later, don’t hold your breath. According to many seasoned investors, low interest rates are here to stay. So you can try and wait out the low interest rate environment while the 2.9% inflation rate eats at your retirement nest egg, or you can be proactive and start weighing-up your alternatives.
One common alternative for those seeking income from their investments is blue-chip ASX stocks. With the S&P/ASX 200 Index (ASX: XJO) (INDEX: ^AXJO) up 55%, not including dividends, since interest rates started falling in November 2011, it’s clear to see why so many investors have taken steps to not only conserve their wealth but grow it.
The good news is, there are plenty of 5% plus dividend stocks available on the market. The bad news is, not all are a ‘Buy’ at current prices.
1. The perfect example is National Australia Bank Ltd. (ASX: NAB) who has an 8.5% grossed-up dividend yield. Unfortunately, despite its huge payout, its UK banking exposure and bad commercial loan portfolio continue to weigh on earnings and make the threat of lower cash profits (and therefore a falling share price) very real. It is not a buy at current prices.
2. Westpac Banking Corp (ASX: WBC) also offers a first rate dividend. It is forecast to pay a dividend equivalent to 6.8% grossed-up in the coming 12 months. However, with a mixed outlook and high share price, Westpac appears to be fully, if not overvalued.
3. Telstra Corporation Ltd (ASX: TLS) stands out as a quality long-term buy. Analysts are forecasting a dividend payment of 29 cents per share fully franked in the next 12 months, giving it a 7.7% grossed-up yield at today’s prices.
The BEST dividend stock on the ASX
NAB, Westpac and Telstra are each forecast to pay excellent dividend yields to investors wanting an escape from the low-interest rate environment. However on a personal level, none of them are currently in my portfolio because I think there are even better dividend stocks on the ASX.