The Australian sharemarket's surge has been driven by investors' insatiable hunger for high-yield dividend stocks over the last few years as interest rates have plummeted to record lows.
Given the measly returns on offer from 'risk-free' assets such as bonds and term deposits, investors have flocked towards companies such as the big four banks, which have delivered enormous profits, in the form of both dividends and capital gains.
While investing for dividends is a great strategy; it does carry its fair share of risks. Investors can be lulled into a false sense of security by a stock's high yield, whilst simultaneously forgetting the importance of price and whether or not those dividends can actually be sustained.
Take Fortescue Metals Group Limited (ASX: FMG) as a perfect example. Last year, the iron ore miner distributed a total of 20 cents per share (fully franked) to shareholders which, until recently, would have indicated a yield higher than 10%. In February however, the miner announced a first-half dividend of just 3 cents per share, indicating a substantially lower full-year return for shareholders.
Likewise, the Fairfax press drew attention to the market's current five highest-yielding stocks, all of which are trading on yields higher than 10%. These include Myer Holdings Ltd (ASX: MYR), Seven West Media Ltd (ASX: SWM), Metcash Limited (ASX: MTS), Genworth Mortgage Insurance Australia (ASX: GMA) and Monadelphous Group Limited (ASX: MND).
As appealing as a dividend yield greater than 10% might sound, it could also reflect the market's lack of confidence in the company's ability to maintain those dividends. After all, if the market believed they could pay them, they would bid the stock price higher and reduce the yield.
3 dividend stocks to buy today
In case you were wondering, I have strong reservations on each of the six companies mentioned above, and would not consider buying them today. But that's not to say I'm not part of the market-wide hunt for dividends.
Woolworths Limited (ASX: WOW) and Coca-Cola Amatil Ltd (ASX: CCL) are both companies I would consider buying today. While I already own Coca-Cola Amatil shares, their recent earnings report has given me the confidence needed to consider increasing my stake in the near future. While there is potential for strong capital gains, the stock is also expected to yield 4% this financial year, franked to 75%.
Supermarket behemoth Woolworths is a stock that I do not yet own, although I am very tempted to buy based on its current price tag (although I will have to wait at least two trading days given The Motley Fool's strict disclosure requirements). Woolworths' shares are currently trading 24% below their 52-week high and offer a compelling 4.7% fully franked dividend.
Collection House Limited (ASX: CLH) is another stock I own (and would consider buying more of) for both growth and dividends. The debt collection business has demonstrated its ability to expand in the past and is set to continue growing for years to come. It has also consistently improved its dividend and is currently sitting on a fully franked yield of 3.7%.
