There's no doubt about it.
A big fully-franked dividend yield looks fantastic in the current low cash rate environment, and this is exactly what's being served up right now after Telstra Corporation Ltd's (ASX: TLS) share price fell 6.5% last week.
As Bruce Jackson stated last week, Telstra's mobile operations are operating in a competitive environment and it doesn't appear to me that this is about to lessen anytime soon.
With revenue, profits and earnings-per-share in a downward trajectory, is there any point in owning shares in a business that is being challenged from all sides?
Consider this about Telstra:
- Its revenues have increased from $23.7b to $25.8b between 2006-07 and 2015-16, a compound annual growth rate (CAGR) of only 0.85%
- Earnings-per-share have fared little better over the last 10 years, increasing from 26.2 cents per share to 34.8 cents as at June 2016, a CAGR of 2.88%, and
- The company's dividends have increased from 28 cents per share 10 years ago to 31 cents per share today, a CAGR of approximately 1%
The most recent half-yearly results have also confirmed no increase in the interim dividend of 15.5 cents per share.
If the dividend is the sole reason for investing for many investors, then I'd argue there should be at least a semblance of growth in the income you expect to receive from placing your hard-earned capital at risk.
The Australian Consumer Price Index, for instance, has shown a CAGR of 2.37% over the 10 years to 30 June 2016.
If you're relying on Telstra dividend income then, you're falling behind in real terms as the growth in your dividends is failing to keep your household income up with the costs of living.
I believe if you're buying shares to live off the income, there are better opportunities out there right now, even if the headline rate is less than that of Telstra's. Consider these three below:
Blackmores Limited (ASX: BKL)
In October of last year, Blackmores advised the market that, despite first quarter sales [for the financial year] being impacted by changes in market dynamics in Australia, the company has seen improved sales and profits from the second quarter with significant new sales being captured in China.
Last quarter's net profits were down by almost half on the 2014-15 financial year but it has to be remembered that the previous year was exceptional for Blackmores meaning that comparatives would be tough.
The company's strategy of exporting to China and SE Asia is long-standing and I see no reason why long term success for the sale of its core products of vitamins and herbal/mineral nutritional supplements here and overseas is being impeded in anyway.
The current dividend yield is a fully-franked 3.5%, and given the company's long track record of increasing its revenue, earnings-per-share and dividends (over time), this company's stock should be considered for any investor seeking growing income.
However, if you're looking to buy shares soon, I'd first wait until after the company's half-year profit announcement has been released to the market.
Retail Food Group Limited (ASX: RFG)
This company is effectively a holder, manager and franchisor of a portfolio of retail food brands such as Donut King, Brumby's Bakery and Pizza Capers to name just three.
Its current dividend yield is almost 4.5% (fully franked) and the company has demonstrated an uninterrupted history of rising dividends since it was floated on the ASX back in 2006.
Food retail is of course a competitive environment and consumer tastes can be fickle, but management seem to know what they're doing and have a good decade of financial performance behind them.
Unlike Telstra, this company is growing and so too is its dividend.
Brickworks Limited (ASX: BKW)
This company is a diversified manufacturer and distributor of bricks, clay and concrete products, but is also a property developer and investment manager with a 42.2% stake in its corporate sibling Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which also owns 44.13% of Brickworks.
If the cross shareholdings between these two companies don't bother you (and I'd argue it's actually a positive), then you can invest with a starting fully-franked yield of approximately 3.7%.
Growth in Brickworks' dividend hasn't grown as fast as Blackmores or Retail Food Group but nevertheless it has better prospects for growth than Telstra in my opinion.
Each of the three stocks above are ideal candidates for any SMSF portfolio and in addition to these three stock ideas, we've also compiled a report to help trustees keep their SMSF in top shape throughout 2017.
