Did you know your money will double in 10 years if you can achieve a 7.2% annual return each year?
Only 7.2%. Sounds easy right?
Especially when you consider some blue chips in the S&P/ASX 200 (INDEXASX: XJO) pay dividends well over 5% fully franked.
When tax-effective franking credits are taken into consideration however, those dividends equate to a yield more like 7%.
Meaning, your investment need only gain a few percent, each year, to reach your goal of doubling your money.
Not so fast…
As you're well aware, investments which seem most promising are usually the ones which come with the highest degree of risk.
Blue chip stocks are no exception and can quickly fall in value when they don't meet analysts' growth forecasts or when the market goes into a correction period.
Although the risks are very real, particularly now the market is riding high, by conducting rigorous research and remaining cautiously optimistic about the future of stocks, we greatly increase our chances of avoiding potential pitfalls to our wealth.
Two stocks with 7% dividends
Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are two excellent dividend stocks, yielding 7.3% and 6.9% grossed-up, respectively.
However, any seasoned investor should be asking themselves: Is now is a good time to buy?
Chances are, if you're in it for the long term, the answer is no.
Dividend stocks (and the broader share market) have risen incredibly with interest rates at unusual lows.
Prudent stock picking is now more important than ever.
Buy, Hold or Sell?
I believe neither bank is a buy at today's prices but there is a strong case to be made for holding onto them through the next market downturn. That's because if you sell now it's unlikely you'll be able to find an equivalent undervalued blue chip stock, which yields the same dividends.
However, if I were a Westpac shareholder, I'd seriously consider the opportunity cost of holding onto a stock which many analysts are saying may be fully, if not over-valued at today's prices, given its growth forecasts.
