Investing for income isn't only about buying the highest yielding stocks. Other considerations are also important. I prefer mature companies with a history of strong dividend payments, a high payout ratio, and enough growth to sustain increases in the dividend paid annually.
All else being equal, quality companies with no debt and high returns on equity are also preferable.
While it is difficult to find companies who meet all of the criteria outlined above, there are a few sectors which seem to tick many of the boxes, although not without some risk.
I'd be inclined to spread my investment across banking, Telstra and three strong companies with moderately high yields.
The big banks have taken a few hits recently, not the least of which have come from the royal commission. One might think seriously about their prospects for meaningful growth over the coming years.
Nonetheless, if Westpac Banking Corp (ASX: WBC) maintained its dividend at $1.88 per share, this would represent a yield of 6.6% at the current share price of $29.28.
Alternatively, Australia and New Zealand Banking Group (ASX: ANZ) would have a yield of 5.7% at the current share price of $27.87 if the dividend was maintained at $1.60 per share. Westpac and ANZ have payout ratios of 81% and 82% respectively, and both offer dividends that are fully franked.
While growth may be stilted, I think that there is sufficient strength in earnings with the banks to at least maintain the dividends over time. As an alternative to the big four banks, Money3 Corporation Limited (ASX: MNY) would yield a fully franked 4.7% on a forecast dividend of 9 cents per share, and may have more room for growth in earnings meaning that it also has more room to increase its dividend.
Telstra Corporation Ltd (ASX: TLS) has also taken a hit of late. Weakness in the mobile arm of the business and strong competition has investors less enthusiastic about its future earnings potential than they once were. As a consequence the share price has fallen dramatically – down to six year lows. Despite a recent cut to the dividend, Telstra offers a fully franked 7.7% at the current share price of $2.87. I think that there is enough earnings potential to sustain the current dividend, but even further small reductions would still offer attractive yield for investors.
Lastly, I think that there are a group of strong companies with yields that are attractive, given the quality of the businesses. APN Outdoor Group Ltd (ASX: APO) at 3.7%, DuluxGroup Limited (ASX: DLX) at 3.4% and Flight Centre Travel Group Ltd (ASX: FLT) at 2.7% are all worth a place in my portfolio.
While the yield may not be as high as that currently on offer from the banks, or even from traditional retailers like JB Hi-Fi Limited (ASX: JBH) or Kathmandu Holdings Ltd (ASX: KMD), the strength of these 3 companies combined with moderately high yield is compelling.
