With the Aussie economy in a somewhat precarious position, owning high-yield stocks could be a means of countering potential capital losses. That's not to say that in the long run the returns from the ASX will be negative. But, in the short run there is a real risk that the recent stock market rout will continue.
Of course, finding the best dividend-paying stocks can be tough, with the financial performance of many of the ASX's constituents understandably being closely linked to the wider economy's outlook. For example, Woolworths Limited (ASX: WOW) is seeing its sales come under sustained pressure as a result of weak wage growth and a relatively high level of unemployment. Both of these factors are causing shoppers to rein in their spending, with price becoming a much more important consideration for them.
As a result, no-frills operators such as Aldi and Costco are grabbing market share and, over the next two years, Woolworths is forecast to post a fall in its earnings of 7.5% per annum. Although disappointing, dividends are not currently expected to be affected, with Woolworths due to maintain its current level of payout which equates to an annual yield of 5.7%. And, with dividends being covered 1.2x by profit even when the forecast fall in earnings is taken into account, Woolworths remains a top notch income play.
The same could be said of QBE Insurance Group Ltd (ASX: QBE), although unlike Woolworths the insurer is set to enjoy a purple patch over the medium term. This is a direct result of a sound strategy which is seeing QBE gradually sell-off assets which it deems to be either too risky or not profitable enough, with the resulting 'core' business set to become more efficient and more profitable; as evidenced by a bottom line which is due to rise by 25% per annum during the next two years.
This should allow QBE to increase dividends at a rapid rate, with a similar rise to profit growth being anticipated by the market. This puts QBE on a forward yield of 5.6% and, with the company expected to have a payout ratio of 67%, its dividends appears to be highly sustainable, too.
Meanwhile, contracting company Cimic Group Ltd (ASX: CIM) may not appear to be an obvious dividend play, since it was loss-making last year. However, a turnaround strategy seems to be moving the company in the right direction and it is expected to post a profit in the current year before growing it by almost 5% next year.
This means that dividends, being 28% lower than last year, are expected to represent just 60% of profit which indicates that they could rise moving forward. This means that Cimic's yield of 3.9% could grow at a much faster rate than the ASX's yield of 4.8%. And, with Cimic trading on a forward price to earnings (P/E) ratio of 15.3, it appears to offer good value for money, too.
