Dividend stocks still the main game in town says investment bank

It's premature to declare the dividend trade is dead as the latest economic and market developments show why it could be a mistake to dump shares like Woolworths Limited (ASX:WOW) and National Australia Bank Ltd. (ASX:NAB).

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Wild swings in the market are enough to give even the most seasoned investors a bad case of vertigo and it has refocused the conversation back on yield from growth.

The latest capital expenditure data from the Australian Bureau of Statistics (ABS) showed a 4% drop in investments on plant and equipment materials by industry. It is now at its lowest level since 2011.

Companies aren't yet willing to invest in growing profits and this stands in contrast to the pleasant dividend surprises that ASX-listed companies have been dishing out.

Add in last night's comments from Federal Reserve of New York president William Dudley playing down the chance of an interest rate hike in the US next month with the turmoil in global stock indices and you have an extended "happy hour" for high dividend-paying stocks.

These latest developments will dispel doubts that interest rates will stay lower for longer and that will only emphasise the attractiveness of stocks that can pay high sustainable dividends.

Even the miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) know this as the reporting season has proven their willingness to forgo growth to pay a bigger dividend. Make no mistake, these "growth stock" champions now have more in common with income stocks.

According to the Fairfax press, Goldman Sachs is one of the latest to come out to echo this view as it notes that we will need stable to better economic data from China to shift the focus back on growth stocks. But any fresh signs of a brighter outlook for China are still at least six weeks away and that's a long time in stock market terms.

This is why the investment bank thinks Australia is the place to be thanks to the average 5% yield for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and it has highlighted its list of favourite high yield stocks like supermarket giant Woolworths Limited (ASX: WOW) with its fully franked yield that sits close to 8% for 2015-16, global insurer QBE Insurance Group Ltd (ASX: QBE) with a similar forecast yield, and power utility AGL Energy Ltd (ASX: AGL) with its grossed-up yield of 6%.

If you love yield, you also should look at some of the big bank stocks, particularly National Australia Bank Ltd. (ASX: NAB), because it is the least likely of the group that will need to undertake further dilutive capital raisings.

I am not suggesting you buy the stock for growth because the profit growth outlook for our banks is pretty muddied – and I am saying that kindly.

But it's unlikely that NAB will cut its dividend (barring some black swan event), which is sitting at around a whopping 9% if you count your franking credits.

I am happy to own the stock even if dividends do not increase for the next two to three years given the outlook for interest rates.

It's so hard to wean yourself off the dividend bottle.

Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, National Australia Bank Limited, and Rio Tinto Ltd.. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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