"Australia is in the grip of a raging dividend boom."
That was written by The Australian Financial Review, back on 14 February 2014. Although nearly a year has passed since then, the same holds true today, particularly after the Reserve Bank of Australia decided to cut interest rates for the first time in 18 months earlier in the week.
The decision took many in the market by surprise. While numerous economists had predicted up to three rate cuts to occur at some point during the year, most believed the RBA would hold off until at least March or April to give it a chance to give the market a 'heads-up' regarding its intentions.
But not so. The official cash rate has just fallen to a new record low of 2.25 per cent and the Australian share market has reacted exactly how you would have expected.
The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is up an astonishing 3.4% in the last two days and even surged beyond 5,800 points early in Wednesday's session – the first time it has done so in nearly seven years. While rising commodity prices have played a role in that rally, it's clear that the real money is being thrown at the market's higher-yielding stocks.
With the returns from term deposits and government bonds now looking even less appealing than they were, investors are favouring the lure of easy money to be made in the form of dividends.
Indeed, Commonwealth Bank of Australia (ASX: CBA) has received plenty of attention with its shares skyrocketing to a new all-time high of $91.94 on Wednesday. At that price, it's tipped to yield 4.6% this financial year, fully franked.
Telstra Corporation Ltd (ASX: TLS) has also been targeted by investors. Although the stock actually lost ground on Wednesday, it is still hovering around a 14-year high after a remarkable 26% rally since mid-October. It's shares are currently yielding 4.5%, although it's expected to increase its dividend payments this year.
However, in their search for solid dividends, it seems that investors may be forgetting one of the most simple fundamentals when it comes to investing: the importance of price.
While there is no questioning the high-quality nature of either Commonwealth Bank or Telstra, neither are trading at particularly attractive premiums. Not only does that act to reduce their dividend yields, it also means that returns in the form of capital gains are likely to be limited.
In fact, you could be restricting yourself from long-term market-beating returns whilst increasing your level of assumed risk by buying either stock today.
The very best dividend stock to buy today
In the time that Commonwealth Bank and Telstra have surged higher, one of Australia's other great dividend stocks has been largely neglected by the market. While there are some genuine concerns about its competitive position, and its decision to expand into the hardware industry, it seems that Woolworths Limited (ASX: WOW) may have been oversold.
Indeed, the appeal surrounding the business is enormous. Firstly, it maintains an easy-to-understand business model while it has also built a nearly spotless record of revenue and earnings growth over the last decade – a trait very few companies can claim. Meanwhile, its stranglehold over the Australian supermarket industry appears to be safe and should actually thrive as Australia's population continues to expand.
At $32.79, the stock is trading at a compelling 15.8% discount to its 52-week high. Its dividend is expected to continue rising over the coming years and is tipped to yield 4.4% this financial year, fully franked, or 6.3% when grossed up. As they say, uncertainty breeds opportunity, making Woolworths an excellent pickup today.
