Investors love fixed income securities and who wouldn't? An easy to understand and stable fixed income makes investing easy.
But when bond yields fall and bank account interest rates all but dry up, many investors are forced to accept more volatility and move into equity markets. In the stock market, there's no guarantees and dividends can come under pressure or earnings disappoint.
Despite the risks involved in the stock market, the rewards warrant it, and investors can build their portfolio around some solid core defensive stocks which have brand recognition, modest growth, strong dividends and sustainable business models.
Cochlear Limited (ASX: COH) and Resmed Inc (ASX: RMD) can be considered both defensive and growth stocks due to the nature of their business models. They have patented products which are renowned for their quality and reliability. They have significant international exposure and will benefit from a lower Australian dollar. Respectively, they pay dividends of 4.4% and 1.8%.
If you want a bigger dividend, Telstra Corporation Ltd's (ASX: TLS) payout is legendary. It has a growing pile of cash which is tipped to be used to fund its expansion plans in Asia or possibly returned to shareholders. It meets all the criteria of a core stock and is forecasting strong single-digit earnings growth in FY14.
In the resources sector, it's hard to go past BHP Billiton Limited (ASX: BHP) as a dividend play. Its diversified operations and focus on costs make it an appealing investment in 2014 and beyond. Its 10-year average annual shareholder return is 15.4% not including dividends.
Companies which have barriers to entry and are natural monopolies are sometimes the best dividend stocks. Transurban Group (ASX: TCL) is the owner and operator of toll roads here in Australia and the US. Earnings are expected to grow strongly in coming years and it seems investors have cottoned-on to its ability to pay strong dividends. It currently yields 4.7%.
Foolish takeaway
Although it's impossible to avoid volatility altogether, buying sustainable businesses with healthy balance sheets and room for growth is a market-beating strategy for long-term investors. For new investors it's important to diversify your holdings and know what you own and why you own it. Do your own research and determine whether, or not, it suits your risk tolerance.
