Quality big dividend stocks have been the driving force behind the S&P/ASX 200's (ASX: XJO) (Index: ^AXJO) rally over recent years.
The big banks, including National Australia Bank Ltd (ASX: NAB), and Telstra Corporation Ltd (ASX: TLS) have led the charge.
But after such strong performances from these two market darlings, have they now pushed beyond the buy zone?
Here's what you need to know about each.
National Australia Bank
NAB is Australia's largest bank by assets but also the least profitable of the 'Big Four'. However this hasn't stopped investors bidding up the bank's share price more than 14% so far in 2015. Moreover, a wash of bad press out of the group's two UK subsidiaries – Clydesdale and Yorkshire – hasn't stymied NAB shareholders' 'search for yield'.
However at over $38 per share, NAB is now out of the buy zone. Despite trading on a seemingly low price-earnings (PE) ratio of 14.5x, investors must remember bank profits are cyclical. Indeed, given the recent rally in share price coupled with a much tougher economic outlook for Australia, long-term investors should think twice before hitting the buy button on NAB shares today – even though it is being tipped to pay a 5.3% fully franked dividend.
Telstra Corporation
Telstra is our largest telco and one of the most reliable dividend-paying stocks on the ASX. Its title as a great income stock throughout the market cycle has come about as a result of its large free cash flows and profit margins. Indeed it can afford to charge higher prices for its products (think mobiles, broadband etc.) because it knows consumers will continue to pay-up for the superior coverage and service. This ultimately enables it to drive bigger profit margins and cash flows.
However, like NAB, Telstra shares have rallied strongly in recent times – more than doubling in the past five years – and it appears quite pricey at today's levels over $6.30. Whilst investors could do a lot worse than buy to hold Telstra shares over the long term, waiting for a lower entry point is advisable.
Buy, hold, or sell?
At today's prices and given the bank's accident-prone history coupled with the headwinds facing the economy, I'd look to take some profit off the table if I held NAB shares. However, whilst I'm not a buyer at today's prices, I'd be happy to continue holding Telstra shares throughout the economic cycle for both its reliable dividend yield and long-term growth prospects.
