The market's appetite for high-yielding dividend stocks escalated even higher last week.
The Reserve Bank of Australia surprised investors and analysts alike in delivering its first interest rate cut in 18 months, taking the nation's official cash rate down to just 2.25%. The 10-year Australian Government Bond rate is only marginally higher at 2.55% and the returns from term deposits are by no means spectacular, either.
The truth is, the low interest rate environment is here to stay. To quote Charlie Aitken, cited by The Australian Financial Review, "[For the Reserve Bank] to suddenly change tack with the cash rate already below global financial crisis levels, and abandon a "period of stability" in favour of a new aggressive easing policy is a monetary event which should not be taken lightly."
Indeed, the market is expecting as many as two or even three more interest rate cuts by the end of the year, making dividends the most appealing source of easy income – by far.
As it stands, investors are targeting the big four banks and Telstra Corporation Ltd (ASX: TLS) for their dividend fix. While the dividends might be nice, I struggle to see how any of these five stocks could deliver enough capital gains to ensure total market-beating returns (that is, dividends plus capital appreciation) over the next few years. Already their shares seem fully priced – all logic for basic valuation blown out the window in the desperate search for dividends.
But there is no need to fret, because there are other ways investors can make a nice profit from dividends. By targeting some of the market's underappreciated stocks, rather than the usual suspects, investors could make some very handy profits in 2015 and in the years to follow.
Stock #1: A supermarket behemoth that looks dirt cheap… and offers a gigantic dividend
Although it might seem like a 'boring' pick, Woolworths Limited (ASX: WOW) could be one of the best long-term buy-to-hold investments you make all year.
Since hitting an all-time high at $38.92 early in 2014, the supermarket behemoth has trended 18% lower to be trading at just $31.94 currently. While it is expected to pay shareholders $1.45 per share in dividends this financial year, that puts the stock on a remarkable fully franked yield of 4.5%. Grossed up, that equates to a 6.5% dividend yield.
In the lead up to the company's interim profit announcement, investors appear to be concerned about its struggling Masters Home Improvement chain, as well as its ability to compete with Costco, Aldi Australia and Coles, owned by Wesfarmers Ltd (ASX: WES). While these issues certainly need to be monitored, it appears the market may be a little too cautious – after all, the company has proven its ability time and time again to generate strong shareholder returns; a trend I expect will continue for years to come.
Stock #2: An electronics retailer set to energise your returns
Despite the headwinds facing the retail industry, JB Hi-Fi Limited (ASX: JBH) has managed to maintain its track record for strong revenue and earnings growth, thanks in large part to its low-cost business model and expansion strategy.
While JB Hi-Fi has, for a long time, been Australia's go-to electronics retailer, the company is now expanding its dominance into the white goods and home appliances industry with its new 'HOME' format stores which will decrease its reliance on its waning software (DVD's CDs and games) business. Already, converted stores have recorded 10% growth in sales on average and should provide plenty more growth for years to come.
Despite its growth prospects, JB Hi-Fi's shares have fallen considerably over the last 13 months. Since hitting a high of around $22.50 in January last year, the stock has dropped nearly 25% offering long-term investors a fantastic opportunity. Better yet, the stock offers a whopping 5.1% fully franked dividend, or 7.3% when grossed up for franking credits.
Stock #3: A flat soft drink manufacturer with fizzy prospects
Like Woolworths, Coca-Cola Amatil Ltd (ASX: CCL) has been struck down by investors in recent years. The company has issued numerous profit warnings, stemming from struggling sales and volume growth in its key Australian and New Zealand markets, an underperforming Indonesian division and a strong Australian dollar. The shares have been justifiably punished with investors selling the stock at a 38% discount to its price nearly two years ago, at just $9.64.
Despite its embattled past however, management appears to be turning the ship around, announcing cost reductions of $100 million per annum over the next three years, heavy investment in its Indonesian division (through its parent company, The Coca-Cola Company), as well as a focus on marketing to improve its performance locally.
Although it won't be an overnight fix, investors who buy today could be exposing themselves to some fantastic profits over the coming years, some of which will come in the form of dividends. Right now, the company is forecast to pay 41 cents per share in the 2015 financial year (franked to 75%), reflecting a generous yield of 4.3%.
There's one more dividend stock which could be an even greater buy right now…
