If you’re prepared to invest for five years or more, you should consider at least having some exposure to the Australian share market.
Indeed over the past 30 years, Australian shares have achieved an average yearly return of 11.7%.
Whilst shares are certainly higher risk than term deposits, the 3% to 4% return currently on offer from the major banks leaves a lot to be desired.
Investing for the long term has a number of benefits over other strategies. And once investors move past the idea of risk as volatility and focus on the underlying businesses, it’s easy to see why so many Australians use the share market as their primary wealth generator.
This is especially true for those looking to generate a passive income from their investments. Dividend yields in excess of 4% per year are easily obtainable, plus many of them have the added advantage of tax effective franking credits.
Three of most popular dividend stocks are National Australia Bank Ltd. (ASX: NAB), Woolworths Limited (ASX: WOW) and more recently, Medibank Private Ltd (ASX: MPL). Here’s what you can except from each company in 2015.
Medibank Private has only recently listed on the ASX yet despite starting out on a somewhat expensive valuation, its share price has continued to climb higher. Currently priced at $2.31, retail investors who bought in during the IPO are sitting on paper gains of 15.5%. Whilst the health insurer is being tipped to pay a 4.9 cents per share fully franked dividend in 2015 (giving it a yield of 2.1%), its valuation is eye watering. At $2.31 it trades on a forward P/E ratio over 24 times, which is above its intrinsic value estimates of around $2.08. As a result, Medibank is best left on the watchlist, for now.
National Australia Bank is offering the largest trailing dividend yield of the big four banks, currently 6% fully franked or 8.5% grossed-up. Whilst this is very tempting, particularly in the low interest rate environment, NAB has proven to be accident prone over many years. For example, earlier this year the company was forced to take $1.5 billion in provisions and issue $800 million worth of shares. Given the bank’s current market price, accident prone history and outlook for growth, shares do not appear cheap at today’s prices and investors should keep it on their watchlist, for now.
Woolworths has had a tough year on the market with its share price down 10%. The supermarket giant has experienced intense selling pressure over recent months as concerns over slowing growth and international competition take hold. At $30.40 the stock yields 4.7% fully franked, or 6.8% grossed-up. However at today’s prices I believe it’s best left on investors’ watchlists until we’re afforded a much wider margin of safety.
5 stocks under $5
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*Extreme Opportunities returns as of June 5th 2020
Motley Fool Contributor Owen Raszkiewicz owns shares of Medibank Private. You can follow Owen on Twitter @ASXinvest.
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