We Australians love our dividends…
And why shouldn't we.
They make up about half of the market's historical returns, are tax effective and are a great source of passive income.
For big blue chip stocks, dividends make a big difference to the investment case.
Two of the highest yielding dividend stocks in the S&P/ASX 100 (INDEX: ^AXTO) (ASX: XTO) are National Australia Bank Ltd. (ASX: NAB) and Telstra Corporation Ltd (ASX: TLS).
With interest rates at just 2.5% and inflation at 3%, it's only natural to wonder whether now is a great time to stock-up on these two iconic Aussie companies. Let's take a quick look…
NAB, our biggest bank by assets, has achieved an average total shareholder return (dividends plus capital gains) of 8.4% per year in the past decade. It is the lowest return of any of the big four banks. By comparison, Westpac Banking Corp (ASX: WBC) has achieved an average return of 12.6% per year.
NAB's underperformance can be put down to its poor profitability and troubled overseas exposure. Although its payment of dividends hasn't been affected in recent years, increased capital requirements and an already poor level of profitability do not bode well for shareholders moving forward.
At today's prices, NAB shares trade on a forecast fully franked dividend yield of 5.7% (8.1% grossed-up).
Telstra has achieved an average total shareholder return of 9.8% per annum over the past 10 years. It too has also had a rocky ride and at one stage had over $15 billion in debt.
However in the past five years, Telstra has tidied up its business model and transformed itself into a brand which people know and trust. It has superior products to its competitors and strong ambitions for growth in Asia.
Its International and Network Applications Services (NAS) divisions are likely to lead its top line growth moving forward. However, it's the telco's future payments from the government's NBN Co and super high margin products such as mobiles, fixed voice and data, which will provide very generous cash flows moving forward.
Currently, Telstra is forecast to pay a dividend of 30 cents per share, putting it on a yield of 5.4% fully franked, or 7.7% grossed-up.
Buy, Hold, or Sell?
In my opinion, Telstra is a great defensive business and has one of the most reliable dividends on the ASX. Unfortunately at today's prices neither Telstra nor NAB are a standout buy because their shares are simply too expensive. Keeping them both on your watchlist, whilst also being vigilant for other big dividend ideas is a great way to go about your investing. And you don't have to go far to find other great ASX stock ideas…
