Looking for solid dividend-paying stocks? Not so fast. Keep in mind that investors looking for dividend income can't rush heedlessly into so-called blue chips. It's also important to pay careful attention to the price paid for shares.
For example, typical ASX blue chips like Commonwealth Bank (ASX: CBA) and Wesfarmers (ASX: WES) offer fairly generous yields, but the stocks hardly look to be in value territory from a valuation perspective.
Two far better ideas
When it comes to value-priced shares with hefty yields, it's hard to do better just now than department store chain Myer (ASX: MYR) and distribution business Metcash (ASX: MTS). Neither is currently a favourite of Mr. Market or of the yield-chasing crowd, and therein lies savvier investors' opportunity.
In fact, shares of Myer are trading for about 11 times earnings, or about 8 times free cash flow. This is despite the retailer's growing sales, strong margins and good degree of insider ownership. The company has also paid off more than half the debt with which it came to market in its 2009 float, and capex and other costs have also been trending down in recent years.
Myer shares offer a fully franked dividend in the 7.2% range, or over 10% grossed up. Thus the shares are cheaper and the dividend yield higher than most other retailers.
Metcash shares also look to be cheap, trading at just under 12 times earnings. The grocery and liquor distribution business is well known to be low margin, and Metcash over the long term is caught in a tough position between Australia's supermarket duopoly of Woolworths (ASX: WOW) and Coles. Still, Metcash is a well run company overall and the share price today offers a reasonable margin of safety.
A deal worth taking
Even better, Metcash shares now pay a fully franked dividend in the 7.6%, also over 10% grossed up. Not only are investors being offered a compelling price, but they're also offered a hefty built-in return that will get them the best part of the way to the average annual market return. That looks to be a deal worth taking.
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More reading
- New frontier in battle between Wesfarmers and Woolworths
- Australia's most trusted brands
- 6 facts Woolworths shareholders need to know
- Best and worst stocks on the ASX today
Motley Fool writer/analyst Catherine Baab-Muguira does not own shares in any company mentioned in this article.
