With inflation at 3% and many economists and financial commentators suggesting interest rates could go lower than their record 2.5%, investors right around the country are scrambling to move their money out of costly term deposits and savings accounts, into higher-yielding assets.
For Australian investors that normally means putting more funds into the property market as well as blue-chip stocks included in the S&P/ASX200 Index (INDEXASX:XJO) (ASX:XJO).
However, in the wake of unprecedentedly low (and even negative) interest rates throughout the world, more and more foreign money is headed towards Australia's biggest dividend-paying stocks. Since foreign investors perceive Australia's big banks to be safe-as-houses and our economy as one of the most stable.
So it's now more important than ever for investors to take a careful look at some of our biggest companies' valuations and be careful not to overpay.
Three companies at the top of income investors' watchlists are Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Woolworths Limited (ASX: WOW).
Westpac, our second largest bank by market capitalisation and mortgage market share, pays a 5.7% fully franked dividend. However, whilst the bank has a keen focus on Asia and wealth management, analysts are forecasting earnings to grow very modestly in the near term. Thus making shares expensive at today's prices.
National Australia Bank is forecast to pay a 5.8% fully franked dividend in the next year but it too doesn't come without risk. Whilst it recently announced a divestment of some of its bad UK commercial property loans, NAB's subsidiaries in the UK still face a number of headwinds and weigh down the bank's overall investment thesis. Whilst there is an opportunity for NAB to announce higher cash earnings when it reports later in the year, I'd like to see a divestment away from the UK before hitting the buy button.
Lastly, Woolworths is one company many Australian investors know and trust. Unfortunately, many analysts now believe its best days are behind it. While the Masters home improvement chain presents a viable growth area, the company's main business of supermarkets will now come under more intense pressure from international giants such as Costco and Aldi, who both plan to roll out more stores throughout Australia. In addition, whilst the company's 3.7% fully franked dividend yield is attractive, investors have to be willing to pay more than 19 times earnings per share. Something I'm not prepared to do.
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