There's an element of confusion in the market right now.
On the one hand, high-yield dividend shares are as attractive as ever before.
Interest rates are low, sitting at just 2 per cent, and there's talk they could go even lower at some point in the New Year, especially if the Australian dollar keeps climbing.
In fact, forecasts for the cash rate range as low as 1.5 per cent at some point in 2016. Whether or not that happens, it's clear that interest rates are staying low for the foreseeable future.
Here's why…
Consumer confidence is already shaky and wage growth is at a record low.
Inflation levels are at the bottom end of the Reserve Bank of Australia's target range of 2 per cent to 3 per cent and, although it's remained steady in recent months, the unemployment rate is still quite high.
Meanwhile, Australians are up to their eyeballs in debt while Sydney house prices are sitting around record highs.
The RBA knows what could happen if it did increase interest rates, and the scenario would not be pretty.
Like I said, I don't expect interest rates to climb anytime soon, and that's great news for high-yield dividend shares.
A mindless herd of bison
The problem is, investors seem to have no idea where to get those yields right now.
To borrow a line from The Australian Financial Review yesterday, Roger Montgomery, chief investment officer of Montgomery Investment Management, said…
"The pursuit of yields through dividend-paying shares is analogous to a mindless herd of bison stampeding towards a cliff."
That has certainly been the case in recent years.
Traditionally, investors have gone straight for the Big Four banks. Or for Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW), or even BHP Billiton Limited (ASX: BHP).
Now, Telstra's shares are trading on a 5.7 per cent fully franked dividend yield, yet its shares are trading within 5 per cent of a 52-week low.
Woolworths' shares have plummeted, as have BHP's despite the big miner offering a monstrous 9.4 per cent fully franked dividend yield – grossed to 13.4 per cent!
Sure, BHP is facing some pretty strong headwinds and most analysts think the days of its 'progressive dividend' policy are numbered.
But even so, it seems very unlikely that investors would have let a company like BHP trade on such a high yield 12 months ago, even with those risks.
The big banks are the same having each fallen into an official bear market this year.
At their current prices, they offer an average 6.2 per cent fully franked dividend yield. National Australia Bank Ltd.'s (ASX: NAB) is the greatest at 6.7 per cent fully franked.
Go for growing income
Investors certainly seem to have cooled on Australia's biggest and best dividend shares, and for good reason.
A number of Australia's blue chip shares had become wildly overpriced, in my opinion, to the point where greed was likely playing a role in driving their share prices higher.
Many are also facing strong headwinds which could hinder their progress over the coming years.
The banks, for instance, are facing a tougher regulatory environment which could limit earnings and dividend growth. BHP is getting crushed under the weight of falling commodity prices.
Meanwhile, Woolworths is facing intense competition from Coles and Aldi and Telstra's sheer size will limit it from growing anywhere near as quickly as some of the market's other up-and-coming companies.
And that brings me to my next point.
To borrow another quote from the AFR, Roger Montgomery's advice is "Go for growing income, not the highest yield."
It's a sound piece of advice for anyone looking for market-beating returns.
You see, investing in dividend-paying shares is a very smart way to make money over the long-run, but a mixture of dividends and growth can yield even greater results.
Take G8 Education Ltd (ASX: GEM), for instance.
The childcare operator has recorded phenomenal growth in recent years and early shareholders have been well rewarded as a result.
The group is on track to pay out 24 cents per share in fully franked dividends this year. That's up from just 4 cents in 2011, representing a compound annual growth rate of 43 per cent!
The shares have also risen more than 280 per cent in that time, generating incredible returns for investors smart enough to have held on for the ride.
Indeed, you'll find plenty of these kinds of companies on the Motley Fool Dividend Investor scorecard.
Andrew Page, who runs the service, looks not only for ASX shares offering solid dividend yields, but also businesses with plenty of growth potential to improve those dividends over time.
It also just so happens that Andrew will be releasing his latest ASX share recommendation at 4:30pm (AEDT) today!
For the sake of full disclosure, I'll note that I already own shares in this company and am seriously considering adding to my current stake at these prices.
Like G8 Education, this is a company with a solid track record for revenue and earnings growth. It maintains a strong balance sheet and has plenty of room left to grow.
Importantly, it also has a reliable dividend which it has increased significantly since it debuted on the ASX almost a decade ago.
