It could be party time for all you dividend-focussed readers out there, with a number of investors’ favourites hitting their lowest point all year this week.
In the past few trading days the nation’s largest telecom, largest grocer, and a high-dividend index fund have all tested new lows – offering correspondingly higher dividends. But are these investments a real opportunity, or fool’s gold?
Woolworths Limited (ASX: WOW) – last traded at $23.38, down 31% for the year
Woolies is a mixed case. On one hand you have the embattled grocery business which, although struggling, still delivers solid, defensive profits and great cash flow. On the other hand, you have competitor Wesfarmers Ltd (ASX: WES) which goes from strength to strength, an underperforming Masters Hardware division, and no replacement CEO at Woolies.
I consider Woolworths capable of turning itself around, but until a new CEO is found and more certainty comes in the form of decisions about Big W and Masters, I believe today’s prices are not yet low enough to compensate investors for the risks of continuing underperformance. The outlook for its share price is uncertain and will depend in large part on what decisions are made about Masters and Big W in the near term.
Telstra Corporation Ltd (ASX: TLS) – last traded at $5.27, down 9% for the year
Telstra shares hit a low of $5.09 earlier this week, a price that I consider represents decent value for a stock with so many competitive advantages and a 5.9%, fully-franked dividend. The company has given guidance of single-digit profit growth for the current year.
Increasing competition is starting to bite, although Telstra has multiple growth avenues available to it, and its industry is expected to grow for well beyond the foreseeable future – giving it a considerable advantage over bank and resource stocks whose business is cyclical. I would consider buying Telstra shares at around $5.
iShares S&P/ASX High Dividend Index Fund (ASX: IHD) – last traded at $13.26, down 13% for the year
The iShares High Dividend Index Fund might initially look like a good opportunity, but that could well be an illusion. After its recent falls it is now trading roughly in line with its Net Asset Value (NAV) i.e., in line with the total value of the constituent companies that make up the fund.
Altogether, this Exchange Traded Fund (ETF) offers a yield of around 6.8%, which is certainly better than the market average. However, the fund’s five biggest holdings are Telstra Corporation Ltd (9.2%), Commonwealth Bank of Australia (ASX: CBA) (8.89%), BHP Billiton Limited (ASX: BHP) (8.6%), Rio Tinto Limited (ASX: RIO) (8.2%), and Westpac Banking Corp (ASX: WBC) (7.7%).
Telstra looks like a sound investment but there is already a question mark over the share price and dividend yields of the banks and big miners going forwards. Investors might be better off owning high-yielding stocks individually rather than investing in this fund – especially if you already hold the big banks, Rio, or BHP. I would not buy this ETF today.
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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.