Despite Australia's biggest and best companies – in the S&P/ASX 200 (INDEX^: AXJO) (ASX: XJO) – trading at over 15 times earnings, there are still plenty of reasons to be confident in the local share market's near-term outlook.
Notably, the Australian property market is frothy and low interest rates mean term deposits and savings accounts are returning just 3% per year.
All of a sudden those large, tax effective, dividends from ASX stocks are looking pretty good.
The big banks, supermarkets and even retailers have forecast dividend yields two or three times the returns on offer from safer assets like cash.
Here are three investor favourites:
Bank of Queensland Limited (ASX: BOQ) – Grossed-up dividend yield: 7.75%
BOQ is a $4.4 billion bank which is being tipped by analysts to increase earnings per share solidly in coming years, with its strategy of expanding its branch network throughout Victoria and New South Wales. However it is also diversifying its retail lending pathways away from its unique owner-managed branch (OMB) model to capture a larger market. The group has a strong balance sheet, cash return on equity and net interest margin.
Coca-Cola Amatil Ltd (ASX: CCL) ("CCA") – Grossed-up dividend yield: 7.3%
CCA is Australia's, New Zealand's and Indonesia's distributor of Coca-Cola products. It also has the exclusive distribution agreement for Beam-branded products throughout Australia until 2023. The group's bottom line (profit) has struggled to excite the market in recent times, as margins succumbed to increased competition from key rivals and the two supermarket giants. However, today's price of $9.42 per share could be a good entry point into this proven long-term winner.
Westpac Banking Corp (ASX: WBC) – Grossed-up dividend yield: 7.8%
As Australia's second largest bank, Westpac has grown strongly over the past two decades led by both a property and mining boom. Indeed, in the domestic economy, the bank controls approximately 23% of housing credit, 19% of business credit and 21% of retail deposits according to the RBA. Other than via consolidation, Westpac's growth strategy in recent years has been through the rollout of numerous subsidiaries such as BankSA and Bank of Melbourne. Westpac boasts a return on equity of 15.6% and efficiency ratio of 41.6%.
Buy, Hold, or Sell?
At today's prices, I believe Westpac is too expensive to justify a buy rating. However, I would happily own both CCA and BOQ, for their dividend and modest growth potential over the long term.
