With interest rates stuck at record lows, investors from all over the world have been looking to Australian shores for companies with reputations for big dividend yields and sound financials.
But now, with the S&P/ASX200 Index (INDEXASX: XJO) at highest point in over six years, many of today's blue chip dividend stocks appear fully – if not overvalued.
Astute long-term investors should therefore be focusing on the big dividend stocks of tomorrow, not the expensive Westpac Banking Corp (ASX: WBC) or Woolworths Limited (ASX: WOW), but the companies currently out-of-favour with investors.
Three companies which I believe long-term income investors should buy today are Rio Tinto Limited (ASX: RIO), Santos Ltd (ASX: STO) and BHP Billiton Limited (ASX: BHP). Here's why:
Rio is like many of its peers, cutting capex and opex, paying down debt and generating stronger cash flows as its primary commodity, iron ore, slides in price. As the world's lowest cost producer, it has a healthy buffer at the current spot price of the steelmaking ingredient. In coming years, its management have hinted at a greater capital return to shareholders.
Santos, which recently released a strong set of production results, is expected to significantly increase cash flows and dividends in coming years with both the PNG LNG (already online) and GLNG (expected to be completed in 2015) projects in production. In the long term its current share price is likely to appear cheap.
Lastly, BHP Billiton is also experiencing strong growth in production across a number of key commodities but is more diversified than its two peers above. BHP recently announced its full-year results and details on its planned demerger. Surprisingly, the market has since sold down the $193 billion company by 4.5%. It currently boasts a 3.4% fully franked dividend but analysts are expecting bigger payouts in the years ahead.
Buy, hold or sell?
I think each of these resources stocks are a solid buy for those focused on long-term capital gains and dividends. Of the three, Rio is my favourite at current prices.
