Much has been written over the past few years about the “chase for yield”.
This “chase” has become not just a necessity but an obsession for many Australian investors due to the combined effects of the growing popularity of self-managed super funds (SMSF) and the continued grind lower of interest rates.
With economists predicting that the Reserve Bank of Australia could cut the official cash rate even further yet, the demand for consistent and reliable dividend income is bound to continue.
The desire for dividends with the above attributes has forced investors into an ever smaller basket of quality income stocks such as Telstra Corporation Ltd (ASX: TLS) because many blue chip stocks have simply been unable to retain their pay-out rates.
While owning shares in companies that have proven their ability to maintain reliable dividends is attractive, the “chase for yield” has arguably pushed some income stocks to price levels where the valuation looks stretched despite the attractive yield on offer.
In contrast, some out-of-favour blue chips which have been forced to cut their dividend are arguably now attractively priced, offering reasonable yields and possess future upside potential.
Woolworths Limited (ASX: WOW) shares have recently clawed back some of their losses but still remain down 13% over the past year. At least part of this selloff has been caused by investor dismay at lower dividends.
Despite a lower dividend than what shareholders have enjoyed in the recent past, based on analyst consensus forecasts for financial year (FY) 2017, shareholders are still expected to receive 98 cents per share. This implies that the low point for the dividend will have been FY 2016.
With the shares trading at $23.30, a forecast fully franked yield of 4.2% is on offer.
National Australia Bank Ltd. (ASX: NAB) has arguably been the most unloved of the major bank stocks and a small decline in its dividend is forecast to occur in FY 2017.
Looking out to the consensus forecast for FY 2018 however and the bank is expected to once again pay a dividend roughly in line with its record high dividend (set in FY 2015) of 198 cps.
If this forecast proves accurate, then the yield based on today’s share price of $26.83 would be a whopping 7.4% fully franked.