Australian stocks are amongst the highest yielding in the world. Unlike some countries, investors who buy fully-franked shares have the added benefit of imputation credits, meaning the ATO doesn't 'double dip' by taxing both the company and its owners (you and other shareholders).
Couple that with low-tax environments inside of self-managed superannuation funds and it seems you've got a winning investment strategy. However, the investment strategy can come unstuck with poorly thought-out purchases of expensive stocks and slowing growth from big businesses.
For example it appears some dividend stocks, such as Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA), are fully valued and investors face the risk of capital losses in the short term. So avoiding risk by purchasing well-known businesses is, perhaps paradoxically, setting your portfolio up for failure.
As always investors who practice 'buy-and-hold' investing should focus on the merits of the business and make sure to pay a reasonable price in order to mitigate the potential for losses in their portfolio. However, there are a number of well-known companies which I believe hold considerable value for long-term and dividend-hungry investors.
Telstra Corporation Ltd (ASX: TLS) is legendary for its ability to continually pay out high dividends. Its modest growth and big balance sheets make it a force to be reckoned with. Although the local mobile and fixed-internet markets may have reached saturation point, its ability to leverage growth from its market share here in Australia and its ability to grow overseas is vital for its ongoing success. It pays a trailing dividend of 5.6% fully franked, but it could be expected to go higher in the short term thanks to growing free cash flow.
Another telco, M2 Group (ASX: MTU), is also expected to pay higher dividends in 2014 and beyond as investors respond to its changing growth strategy. M2 owns brands such as Dodo, Primus and Eftel. Its organic growth prospects and potential to diversify into other booming industries will enable the company to payout strong returns to shareholders for many years to come. According to Morningstar's analysts' consensus, it has a forecast dividend yield of over 4.2% fully franked.
To pay a stable dividend you don't have to be a big name company. Credit Corp Group Limited (ASX: CCP) is a $430 million company with great dividends and real growth potential. It purchases consumer and small business debts from big name companies in the finance, banking and telecommunications markets of Australia and New Zealand. It is the largest participant in the local market and has a compound annual growth rate in net profit after tax of 29% over the past four years to FY13. It currently trades on a trailing dividend yield of 4% fully franked.
After the worst price fall in 30 years, gold and gold companies should be on investors' watchlists. It definitely appears that 2014 is a buyers' market and although many are selling at huge discounts to their 52-week highs, very few are good value. Northern Star Resources Ltd (ASX: NST) is one of a few gold companies which pays out a stable dividend, largely thanks to its superior balance sheet and low gearing levels. Recently it acquired mines in Western Australia from Barrick Gold Corporation (NYSE: ABX). This will have a positive impact on reserves and production levels in the short-to-medium terms. It currently yields 3.5% fully franked.
Foolish takeaway
Investors just focusing on dividend yields and established business models can end up overpaying for companies. It's important to take a contrarian view of the market and find undervalued stocks with a runway for higher earnings and dividends. Time has shown that 'buy-and-hold' investing is one of the best, if not the best, strategy for stock market success.
