With Aussie investors having a much greater focus on dividends at the moment, many companies are being touted as attractive income plays.
However, there's more to income investing than simply picking out high yield shares and buying them. In fact, the question of dividend sustainability is perhaps most relevant to investors – especially long-term investors who want to see their income rise, not fall, in the long run.
With that in mind, are these three stocks sound long-term income plays?
Santos Ltd
With its share price having fallen by 49% over the last year, Santos Ltd (ASX: STO) is now very much on the radar for income-seeking investors. In fact, it currently yields a whopping (and fully franked) 4.8%, which is highly appealing.
Of course, the declining oil price has been a major factor in Santos' share price collapse and further falls cannot be ruled out.
However, if Santos does meet its current forecasts for the present year, it appears to have adequate headroom with which to make dividend payments. For example, its dividends are expected to be covered 1.3 times by profitability, which is relatively impressive for a major ASX stock.
So, while the price of oil will clearly have an impact upon the company's profitability moving forward, for now Santos appears to be very capable of making its dividend payments and could be a realistic (although highly volatile) income play.
Telstra Corporation
Telstra Corporation Ltd (ASX: TLS) is understandably one of the most popular income stocks on the ASX and it's not hard to see why. The mobile telecoms company currently yields a fat and fully franked 4.8%, which is twice inflation, almost twice the current interest rate, and above the ASX's yield of 4.6%.
However, delving a little deeper shows that Telstra's dividend is forecast to increase by just 1.7% in the current year, followed by no growth next year. This means that, in real terms, the value of Telstra dividends looks set to fall over the next two years, which is rather disappointing.
Looking further ahead, though, Telstra has excellent growth potential mainly because of its increasing exposure to fast-growing markets in Asia. This should allow it to increase dividends at a relatively fast pace in the medium to long term and, with its current dividend set to be covered 1.2 times by profit next year, it seems to offer an appealing mix of dividend stability and growth prospects. As such, it could be worth buying for its income appeal.
Coca-Cola Amatil Ltd
With profits at Coca-Cola Amatil Ltd (ASX: CCL) forecast to fall by 12.6% per annum over the next two years, it's of little surprise that the company is in the process of cutting its dividend. For example, while it was $0.585 in 2013, it is expected to be just $0.405 in the present year – that's a fall of 31% in just two years.
Despite this, Coca-Cola Amatil still yields a very appealing 4.4% and, having cut its dividend, it should be well covered by profit at 1.25 times. The company has significant potential to turn its fortunes around – especially since it has such a strong brand and the opportunity to make cost reductions and expand into faster-growing markets like Indonesia.
Therefore, while dividend cuts are disappointing in the short term, Coca-Cola Amatil remains a relatively appealing income stock. Certainly, there may be some lumps and bumps ahead, but for long term income seekers, it could be a sound investment.
