Paying a good price for quality dividend stocks is paramount. Make no mistake.
Indeed, now more than ever, if your goal is derive a reliable and sustainable income from your investments you need to pay attention to valuation.
Whilst interest rates have been falling over the past three years, share prices of even the most rubbish companies have been growing strongly. However, moving into 2015, the reality is that investors won't be allowed to make such easy money.
In particular companies with high amounts of floating US denominated debt and other overseas funding should be carefully scrutinised. Higher repayments and a lower dollar could be painful for some.
With growth in the Australian economy expected to slow, there will losers in the sharemarket. The 'usual suspects' like the big banks, supermarkets and miners are fully – if not over – valued, so any slip up could send their share prices sharply lower.
Buying stocks purely for their dividend yield is sure to be a quick way to the poor house. Dividends are usually only paid twice per year but there's hundreds of other days when your investment could fall by a far greater amount.
Having a margin of safety on your purchase price is the only way to mitigate the risk of capital loss.
The big banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and even telco giant Telstra Corporation Ltd (ASX: TLS) are not immune from share price falls. At today's prices, I believe none of them have a margin of safety.
The good news is, there are some smaller companies which could handily outperform the market in coming years despite the full valuations of their larger counterparts and bleak outlook for the local economy.
Three stocks I've bought, or am likely to buy, are Ardent Leisure Group (ASX: AAD), Village Roadshow Ltd (ASX: VRL) and Sky Network Television Ltd (ASX: SKT).
Village Roadshow owns cinemas, theme parks and is involved in film production and distribution. Some investors believe its cinema business is a precarious one, given the affordable of home theatres, rampant piracy of movies and the increase of online streaming services. However I'm more bullish on its long-term outlook and the added benefit of a US and Asian expansion could reward shareholders from today's prices.
Ardent is similar to Village, in that it is a leisure and entertainment business, owning theme parks like Dreamworld and White Water World and brands such as Goodlife Health Clubs, AMF and Kingpin Bowling and more. In the US, its Main Event business is growing rapidly.
Finally, Sky Network is New Zealand's leading pay-tv operator with huge household penetration rates and key content rights. Whilst some investors may overlook it for its lack of franking credits, the company has a wide – and growing – competitive advantage which will enable to pay a juicy dividend for many years into the future.
With the New Year not far away, it's time to start thinking about how you'll counter low interest rates on term deposits and savings accounts. However preservation of capital should be your number one goal. To do this, it's vital you don't aimlessly follow the herd into the usual, overpriced, dividend-paying stocks on the ASX.
There's a saying in the sharemarket, "Bulls make money, bears make money, pigs get slaughtered."
Don't be greedy and go for the biggest and most well-known dividend stocks, and don't be impatient. Wait for the best dividend stocks to trade at a reasonable price and then hit buy button.
