High-yielding dividend stocks have been the main attraction for investors in recent times – and for good reason, too.
Interest rates remain at their record low of just 2.5%, bond yields remain depressed and term deposit rates have just been slashed even further! Indeed, investors who have their money stuck in one of these accounts will actually be losing money, once tax and inflation are both taken into account.
While dividend stocks remain a great way for investors to make a healthy profit in the years ahead, investors need to be increasingly careful which stocks they choose to buy.
There are two main reasons for this:
1. Many high-yield dividend stocks have become wildly overpriced
2. A dividend yield is only a fraction of the full picture
Although a stock's dividend yield can play an important role in any investment decisions, it is by no means the only factor that needs to be considered. To extend on that first point, what good is a solid dividend if the stock itself is overvalued? The stock would likely fall back to a more reasonable price over time, reversing any benefits realised from the dividend itself.
Two perfect examples of this are Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC). Their dividends and 'defensive' natures have kept investors coming back for more, but I doubt those who buy now will be rewarded too greatly in capital gains in the long run.
Turning our attention towards the second point mentioned above, a solid dividend yield should never be taken at face value. Take a look at Fortescue Metals Group Limited (ASX: FMG), for example. Right now, the stock is trading on a trailing P/E ratio of 6.6%, fully franked, equating to a grossed-up yield of 9.4%.
As appealing as that looks however, there is speculation that the company may not even pay a dividend at all. The iron ore price is crumbling, making it much harder for Fortescue to pay down its enormous debt levels which could impact its ability to maintain dividends in the near-term. Although the miner has reaffirmed its payout ratio of 30-40% in the long term, it's near-term dividend could certainly be impacted.
3 dividend stocks I'm looking at
Low interest rates are here to stay for the foreseeable future. Heck, they could even fall further before they rise – possibly as low as 2.25%! That's why dividend stocks remain so appealing, provided that you remember those two key points mentioned above, of course.
One company that I believe is very attractively priced right now is beverage manufacturer Coca-Cola Amatil Ltd (ASX: CCL). Although the company has had a rough trot, it appears to be getting back on the right track and maintains a healthy balance sheet which should keep those tasty dividends bubbling. The company is currently expected to pay 42 cents per share in FY15, putting it on a partially franked yield of 4.5% from its current price.
M2 Group Ltd (ASX: MTU) and JB Hi-Fi Limited (ASX: JBH) are also worth a look. While both offer plenty of growth potential, telecommunications business M2 Group is trading on a forecast 3.6% yield, while discount retailer JB Hi-Fi is expected to yield 5.3% – both fully franked.
One more company that is posing as an excellent buy right now has recently been highlighted by The Motley Fool's top investment advisors as their BEST dividend stock pick for 2014-15.
