Dividends might just seem like 'the icing on the cake' to some investors.
Others would argue that they're boring and irrelevant, and that capital gains are what really matter.
But in reality, dividends are so much more than that – especially in today's low interest rate environment.
Right now, you'd be lucky to get a 3% return on your wealth by keeping your money in cash. Inflation and taxes will eat away at those returns too, leaving very little (if any) gains to enjoy.
Like cash, dividends also provide investors with a steady stream of income.
The difference is, they can sometimes yield more than twice what you could get from a term deposit today – especially when you include 'franking' credits.
They also provide a sense of security during times of economic uncertainty and are normally only given by companies that can afford to pay them.
For your benefit, I've compiled a list of THREE dividend stocks below, each of which our Motley Fool contributors think represent great businesses today.
But first, I wanted to draw your attention to a fact that most investors remain unaware of…
The majority of share market gains actually come from dividends.
That's right – according to Money Magazine, the S&P/ASX 200 (ASX: XJO) yielded a 7.7% total annual return in the 10 years to September 2015. A whopping 68% of that was from dividend income.
Dr Shane Oliver, Chief Economist for AMP Capital, goes one further. He said that "just over half" of the 11.8% total annual returns from Australian shares since 1900 have been from dividends.
That's a pretty convincing record, and one I wouldn't be willing to bet against in the future…
You see, Australian companies are renowned for paying out a high proportion of earnings as dividends.
The payout ratio has averaged around 75% for the last three decades or so. It's significantly higher than those of companies in other major markets around the world, and that's great for Australian investors.
Aside from the obvious tax benefits (in the form of 'franking credits') attached to many dividends, here are a few reasons why…
- Retaining too much capital can lead to poor investment decisions, or 'diworsification', as Peter Lynch would call it. By paying dividends, investors can choose where to invest their money themselves;
- High dividend payouts suggest earnings are real and backed by cash flow and indicate management's confidence for the future; and
- Dividends offer a way to keep feeding your brokerage account. Reinvested dividends can add to the magic of compounded returns in the long-run, effectively turbocharging your wealth.
Although investing for dividends doesn't need to be complicated, it's not as easy as investing in any old company either.
Take Telstra Corporation Ltd (ASX: TLS), for instance. It offers a tasty 5.9% fully franked dividend yield, but most of its growth is surely behind it.
Commonwealth Bank of Australia (ASX: CBA) and its Big Bank brethren are the same.
Each offers a lucrative dividend yield but tougher regulations and limited earnings growth potential could limit any dividend gains over the coming years.
With that in mind, I asked three Foolish contributors for their favourite dividend stocks today.
Here's what they came up with…
Mike King — Wesfarmers Ltd (ASX: WES)
Currently paying a 5.6% dividend yield (grossing up to 8%) and likely to grow significantly over the long-term, Wesfarmers holds a stable of fabulous businesses including Coles, Bunnings and Officeworks.
Fears of a supermarket price war have been overdone and trading near 52-week lows, Wesfarmers is a great dividend pick.
Disclosure: Mike King owns shares in Wesfarmers Ltd.
Sean O'Neill — Retail Food Group Limited (ASX: RFG)
Retail Food Group is delivering growing profits and solid cash flow from operations, leaving a decent amount of change after dividend payments to shareholders are accounted for.
With some of the country's premier franchises — Donut King, Gloria Jean's, Brumby's, and more — in its stable and plans to expand into south-east Asia and China, I think Retail Food Group's best days could be yet to come.
The shares currently offer a 5.3% fully franked dividend yield.
Disclosure: Sean O'Neill and Ryan Newman both own shares in Retail Food Group.
Owen Raskiewicz — Flight Centre Travel Group Ltd (ASX: FLT)
Flight Centre Travel Group is a top mid-cap dividend stock pick in my book. It's cashed-up, has a growing international franchise and is run by one of the savviest management teams on the ASX.
While the short-term outlook may be a little uncertain (isn't it always?), its solid track record gives me confidence it'll deal with the challenges if/when they arrive. The shares currently offer a 4.3% fully franked dividend yield.
Disclosure: Owen Raskiewicz owns shares in Flight Centre Travel Group.
The best dividend stocks to buy today
While there are plenty of great companies trading on the ASX today, some investors will choose to go down the do-it-yourself route.
However, others may want the help of an expert to locate and identify these potentially market-beating returns, and that's where Andrew Page comes in.
Andrew heads our Motley Fool Dividend Investor service whose scorecard is made up of wonderful companies sharing similar features to those mentioned above.
Each possess strong balance sheets and reasonable growth prospects.
Many travel 'under the radar' of the broader investment community and offer both dividend income and the opportunity for considerable capital gains as well.
If that sounds like something you'd be interested in, I urge you to click here now…
Because at 4:30pm AEDT today, Andrew will be releasing two of his own Best Buy Now dividend stocks!
These are companies that are already on his list of "BUY" recommendations which Andrew believes are the best places to put new money to work today.
With one of the companies offering an unbelievable 9% dividend yield, it's easy to see why Andrew is so excited to send this update to members…
Indeed, we've made it as affordable as possible for you to join Motley Fool Dividend Investor today so you can be among the first individuals to learn the names of these two dividend dynamos.
