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3 of the best ready-to-buy dividend stocks

Low interest rates have caused havoc for many investors, particularly retirees who in the past may have preferred to keep some cash in the bank to provide a safe and steady income. Instead, the low rate environment has forced many investors to seek out higher yields from equities.

While many of the highest yielding opportunities are to be found amongst smaller stocks such as E&A Ltd (ASX: EAL), which I identified here as offering a potential 10% yield, most investors prefer to limit their investments to larger companies – the trade-off is a lower yield.

A major concern I have is that many investors have become so caught up in the ‘chase for yield’ that they may have become complacent about stock valuations. It is important to not blindly chase yield without giving fair thought to value and the potential for capital gain or loss.

Right now there are some large, ‘blue-chip’ stocks which not only appear to offer growing dividends, but importantly their valuations look reasonable too.

Insurance Australia Group Limited (ASX: IAG) is forecast – according to consensus estimates compiled by Morningstar – to grow its dividend to 36.2 cents per share (cps) in FY 2015. With the stock trading at $5.97 this implies a fully franked dividend yield of 6.1%. While only miniscule earnings growth is forecast year-on-year, the price-to-earnings (PE) ratio is an undemanding 11.3.

Investing shouldn’t be about owning the ‘prettiest’ stocks, often it is the out-of-favour ‘ugly ducklings’ which go on to outperform. This is what shareholders in Toll Holdings Limited (ASX: TOL) will be hoping for! Toll is forecast to grow both earnings and dividends over the two years to FY 2015. If it meets consensus, then at $5.22 the stock is trading on a fully franked dividend yield of 5.5% and a PE of 12.8.

There’s a reason Telstra Corporation Ltd (ASX: TLS) is such a popular income stock and makes this list. The stock trades on an expected yield of 5.4% and while the forecast PE of 16 isn’t cheap, a premium for quality probably justifies the current pricing.

Do you hold our top dividend stock for 2014-2015 in your portfolio?

Every year, Motley Fool investment advisor Scott Phillips hand-picks 1 ASX dividend stock with outstanding potential and it's not IAG, Toll or Telstra! 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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