The Reserve Bank of Australia (RBA) has just declared that the cash rate will remain on hold at 2.5% meaning the RBA has now maintained rates at this record low level for 13 straight months. This would suggest one thing for investors – the chase for yield is still on!
As we’ve spoken about many times before, a tunnel vision focus on dividend yield at the expense of capital growth is a risky strategy. A much better strategy is to identify a stock which can provide a solid franked dividend yield, has the potential for capital appreciation, and is available at a fair price.
Insurance Australia Group Limited (ASX: IAG) looks to meet these three criteria…
According to data provided by Morningstar, IAG is forecast to pay a dividend totalling 35.3 cents per share (cps) in FY 2014. With the share price at $6.08, this implies a fully franked yield of 5.8%.
Fully franked. Tick! Yield more than twice the cash rate. Tick!
The combination of significantly improved guidance for IAG’s insurance margin coupled with the synergies which should be achieved from the recent acquisition of Wesfarmers’ underwriting business sets the scene for earnings per share growth over the medium term. This should in turn support an increase in future dividends.
Potential for capital appreciation. Tick!
Finally, with IAG trading on a FY 2014 forecast price-to-earnings ratio of 10.8x, the stock doesn’t look expensive and would appear to be a fair price to pay for the stock. Tick!