High-yielding dividend stocks could play a key role in driving the Australian share market higher over the next 12 months, just as they have done in recent years.
While interest rates are already sitting at a record low of 2.5%, it is widely expected that the Reserve Bank could lower its cash rate at some point this year. In fact, a number of analysts are anticipating two rate cuts, taking the cash rate as low as 2%, or lower.
Given that the returns from term deposits and government bonds are already woeful enough at the current rate, investors will increasingly turn towards high-yielding stocks in order to generate sufficient returns. If we're lucky, this behaviour could drive the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) back towards that coveted 6,000 level.
But it won't be just any dividend stocks that will deliver market-beating returns. While companies such as Commonwealth Bank of Australia (ASX: CBA) or Telstra Corporation Ltd (ASX: TLS) could climb higher, they are already trading at very high premiums meaning that the big profits have likely already been made.
Instead, investors should have a look at these other stocks which could not only provide fantastic dividends, but also strong capital gains.
1. Woolworths Limited (ASX: WOW). The supermarket behemoth is trading at a considerable discount to its 52-week high price. While there are some genuine concerns regarding the entry of Costco and Aldi into the market as well as its struggling Masters Home Improvement chain, these concerns appear to have been overplayed, giving long-term investors the perfect opportunity to buy. At $29.99, the stock is expected to yield 4.8% fully franked this financial year.
2. RCG Corporation Limited (ASX: RCG). The owner of The Athlete's Foot shoe store chain is a much smaller retailer with a market cap of just $183 million, which could explain why the stock hasn't been swept up like other high yielding stocks. At 69.5 cents, the stock is expected to yield 6.8% fully franked this financial year. Grossed up, that's a yield of 9.7%.
3. Scentre Group Ltd (ASX: SCG). Lower interest rates would likely improve consumer confidence levels which would directly benefit the shopping centre operator. In November, the company reported that its Australian stores had enjoyed 15 consecutive months of improvements in retail sales – a trend that will, hopefully, continue over the coming years. In the financial year 2015, the stock is expected to yield an impressive 5.8%.
4. Coca-Cola Amatil Ltd (ASX: CCL). The company has had a disappointing run over the last two years, but it looks to be getting back on the right path since the implementation of its strategic review. Despite its struggles, it has maintained a strong balance sheet allowing it to still pay a decent dividend (albeit it slightly lower than last year's). Based on Morningstar estimates, the company could pay a dividend of 40.5 cents per share in FY15, putting it on a yield of 4.4%, franked to 75%.
5. Flight Centre Travel Group Ltd (ASX: FLT). Shares of the travel agency business have suffered over the last 10-months or so, having plunged more than 40% in that time. However, the factors affecting the business appear to be short-term in nature, meaning that now could be a great time for long-term investors to make their move. The stock offers a 4.5% fully franked dividend.
As good as each of these companies could be over the next 12 months, there's one more stock which could be an even greater buy today.
