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A top income stock for smart investors

Investors left, right and centre and currently stumbling over themselves to fill their portfolios with high-yielding stocks to help counter the low interest rate environment. If the recent announcements by three of the four major banks that they will reduce their fixed mortgage interest rate is anything to go by, it would appear low interest rates could be with us for a while yet.

Given the circumstances, it’s completely understandable that investors including self-managed super funds (SMSF) and retirees are looking to fully franked dividends to replace unattractive, low interest baring deposit accounts.

While this “yield chase” is understandable there are certain ways to play this theme which are smarter than others.

The Fakers

Companies such as grocery wholesaler Metcash Limited (ASX: MTS) have a published trailing yield of 6.6%. Investors need to be aware that this is a snapshot of the past; the future is nowhere near as rosy, with Metcash trading on a forecast yield of just 5%.

Tried and true but expensive

Commonwealth Bank of Australia (ASX: CBA) is trading on a forecast yield of 5.1%. While this is likely a maintainable yield (although this is debatable) the bigger concern is that at a forecast PE of 14.6, investors are paying a high price for the stock and putting themselves at valuation risk.

The Smart Money

Investors who take a more holistic and longer-term view stand the chance of making better overall returns. For example, according to one leading broker’s forecast, Austbrokers Holdings Limited (ASX: AUB) is trading on a forecast fully franked yield of 4.1% and PE of 15.2.

Given the outstanding long-term gains in earnings this business has achieved, investors could reasonably expect earnings and dividends to grow at a decent rate in the future. This makes Austbrokers an appealing purchase, based on both future yield and valuation grounds.

Discover our top dividend stock for 2014-2015

Austbrokers looks to have the right mix of quality, sustainability and growth which investors should seek out for their portfolio. There's another stock which also holds all these characteristics and is a MUST KNOW for smart investors. 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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