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Avoid this common investment mistake with these 3 dividend-paying stocks

One of the more unusual and exciting aspects to sharemarket investing is the constant need to remain grounded and aware of your own psychological tendencies. The need to understand human nature in the context of investing is not new; indeed Warren Buffett’s long-time investment partner Charlie Munger gave a lecture in 1995 entitled “The Psychology of Human Misjudgement”!

As value investors know, it is precisely because of human nature that many wonderful investment opportunities arise. One example of human nature in action is the tendency to extrapolate the recent past into the future. This can lead to investors paying an enormous premium for a stock which has historically grown quickly on the assumption that the growth rate will continue indefinitely into the future; alternatively it can lead to the discounting of a stock because of a recent past event which may lead to an unduly pessimistic view of future performance.

Look forward not backwards

One way to potentially benefit from this trait which afflicts many investors is to analyse high-yielding stocks. Often a historically high quoted yield suggests the market has little faith in the future dividend to be paid. While the market will regularly get this assessment right, there are also times when investors can utilise the market’s misjudgement to scoop up truly high yielding opportunities.

Metcash Limited (ASX: MTS) is trading near its 52-week low after having disappointed the market with its earnings outlook. While earnings growth may be some time off, analyst consensus provided by Morningstar forecast the dividend to rise in 2016, implying a fully franked yield of 5.9%.

Insurance Australia Group Limited (ASX: IAG) is not forecast to achieve much growth in 2015 but the dividend is forecast to rise by 2.2%. The stock is trading on a forecast fully franked yield of 6.1%.

Coca-Cola Amatil Ltd (ASX: CCL) has also been shunned by investors recently due to a forecast decline in earnings and dividends in FY 2014. By FY 2015 however, earnings and dividends are expected to begin to recover with the stock forecast to yield 5.3%.

Do you know our top dividend stock for 2014-2015?

Metcash, IAG and Coca-Cola Amatil are each trading on high forecast dividend yields but there is an even more appealing income opportunity available right now for investors to buy. Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential. Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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