Right now, the Australian share market appears the best place to park your investment dollars.
Indeed with the Reserve Bank of Australia expected to lower the official interest rate from its current 2.25% to just 2% next Tuesday, you can bet your bottom dollar the return on term deposits and savings accounts is going to keep falling.
In fact, just last month the idea of interest rates hitting 1.75% in 2015 appeared nothing but a pipe dream for housing market speculators.
However, overnight, iron ore fell below $US50 per tonne – down 31% in 2015, so far.
Moreover, with forecasts for higher unemployment and subdued levels of consumer and business confidence in the year ahead, the 1.75% official cash rate estimate doesn't appear too bad after all!
For investors – like me – who are reluctant to get into the overpriced Australian property market, share market dividends are looking good.
Unfortunately in my opinion, 'The Search for Yield', as it is colloquially known, has made some investors to become complacent with their stock selection.
Look no further than those searching for yield in resources stocks like Woodside Petroleum Limited (ASX: WPL) and BHP Billiton Limited (ASX: BHP).
Even if they continue to pay handsome dividends in 2015 and beyond, shares in both companies are down more than 11% in the past year, meaning the share price loss greatly outweighs the expected benefit of their bi-annual dividends.
Resources companies and miners do not make good dividend stocks.
I'd know. In 2014 I lost more than 50% on my instalment warrants in 'diversified mining giant', Rio Tinto Limited (ASX: RIO).
Many financial stocks should also be avoided today.
Sure, some currently offer fantastic dividend yields. But if you're depending on a reliable dividend yield over the entire economic cycle (meaning, seven years or more) then your portfolio shouldn't be overexposed to names like Macquarie Group Ltd (ASX: MQG), Platinum Asset Management Limited (ASX: PTM) and Magellan Financial Group Ltd (ASX: MFG).
Money managers, investment and retail banks are heavily leveraged to market cycles and their dividends will be cut in the event of an economic shock.
Whilst the big banks, including the likes of National Australia Bank Ltd (ASX: NAB), have an implicit government guarantee, thus making them a 'safer' option for savers, that guarantee does not extend to dividends.
Higher unemployment and a frothy property market present as key risks to the big banks' share prices and dividends.
That's made worse by their lofty share prices. As it stands, investors should avoid buying NAB shares – and those of its peers.
2 stellar dividend stock ideas
When Australian investors think of dividends, Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW) would likely spring to mind.
However at today's prices, in this Fool's opinion. Only one presents as a good buy.
Indeed investors who choose to buy Telstra shares today will be paying too much for its anticipated future growth in both Australia and Asia. At 19x 2015 earnings per share, it is simply too expensive for a $77 billion company which will likely achieve just single-digit profit growth in the coming years.
Woolworths, on the other hand, has seen its share price sold off in recent months.
Like Telstra, Woolworths is a defensive business which is likely to continue paying a strong dividend even in the toughest economic conditions. Unlike banks or asset managers, both companies sell non-discretionary items.
Further, the fears of profit margin erosion (from increased competition) appear to be baked into Woolworths' share price. Down 18.6% in a year, the valuation of its shares is compelling in relative terms.
Its competitive advantage in the supermarket space, 4.7% fully franked dividend yield and decent valuation make it a high-conviction buy for income investors in the current economic environment.
