We Australians love our dividends…
After all choosing between a 2.5% interest rate on term deposits and fully franked yields over 5% is a no-brainer, isn't it?
Especially if investors can effectively use the low tax rates inside superannuation accounts, coupled with an added bonus of a chance at capital gains… it's easy to see why so many people invest in blue-chip dividend stocks.
However, a word of warning, those chasing high dividend yields need to be very careful.
Stock prices go both ways and company directors can choose to withhold dividends if they believe it is in the company's best interest to do so.
Being able to identify companies which will make the best income investments in future years is not easy.
Here are four ASX–listed companies which have established themselves as fine dividend stocks but are perhaps best left on your watchlist until we're afforded more compelling prices to make an investment.
- Insurance Australia Group Ltd (ASX: IAG) is the name behind brands such as CGU, SGIO, NRMA and more. Not only does IAG boast extremely profitable operations in local markets, it is also expanding into Asia through joint venture partnerships. It is expected to yield a dividend of 6.08% in the next year (8.67% grossed-up).
- National Australia Bank Ltd (ASX: NAB) is Australia's biggest bank by assets. Despite its troublesome foreign exposure, NAB has achieved a decent average annual total shareholder return of 7.8% over the past decade. Given its relative underperformance however, NAB trades on the lowest valuation multiple of the big banks and has a dividend yield of 6.2% fully franked (8.8% grossed-up). Even so, it's no bargain and investors would be wise to keep it on their watchlists for now.
- Woodside Petroleum Limited (ASX: WPL) is our biggest independent oil and gas company. A plunging oil price has seen its share price sold down in recent months. Whilst it's 8.4% trailing fully franked dividend appears irresistible, speculation is growing Woodside could be forced to cut its payout in 2015. Although it could prove a good buying opportunity for long-term investors, Fools (capital 'F') should keep their distance until the outlook for the company becomes a little clearer.
- Telstra Corporation Ltd (ASX: TLS) is a favourite Australian dividend stock. Its enviable free cash flows and dominant position in the domestic technology and telecommunications market enable it to pay huge dividends, whilst also investing in new growth areas. It is forecast to pay a 4.84% fully franked dividend (6.9% grossed-up).
Buy, Hold, or Sell?
Despite offering big dividend yields, none of these four companies appear to be compelling value today. Whilst I expect each to be more profitable over the long term, only IAG is hovering near a price I'd be willing to pay for its shares. However, in my opinion, investors should wait for lower prices before hitting the buy button.
