Dividend stocks are set to become more popular among income investors who will get smaller returns from bank term deposits and fixed income assets. The RBA finally cut rates this month, but that may be just the opening of a log jam for further cuts.
How low will they go? Hard to say, but for sure they're not heading higher for some time.
Dividend investors are more geared toward long-term portfolio income growth, so there are opportunities to build positions in solid blue-chip companies with an eye to the future.
Woodside Petroleum Limited (ASX: WPL) is one that currently offers an enormous 7.4% fully franked yield. The giant oil and gas producer has utility company-like earnings qualities that can generate steady cash flow for many years. But with such a high yield on a big, established company, what's the catch?
The crude oil price collapse could hit Woodside's near-term earnings if the price slump continues for an extended period. There's real concern Woodside will cut its dividend. The stock has sold off about 22% from August highs last year, so the yield keeps rising. Although it is still an attractive long-term investment, investors should definitely wait until it reports full year results next week. Woodside could sell off even further once the market knows the dividend story. Keep this one on the watchlist, but hold off for lower entry prices.
Another one to watch is Insurance Australia Group Ltd (ASX: IAG). Coming in at a 6.1% yield fully franked, the insurance stock is forecast to have a mid-single digit decline in annual earnings in financial year 2015. Yet the company expects gross written premium growth to be around 17% – 20% in FY 2015, mostly due to the acquisition of Wesfarmers Ltd's (ASX: WES) insurance underwriting business.
The recent Brisbane hail storm related damage claims will be one big factor when it reports interim results next week as well. The insurer has a natural peril allowance provision of $700 million for financial year 2015 and on top of that reinsurance coverage of $150 million for claims in excess of $700 million. Investors can buy on weakness as Insurance Australia Group further increases its market share lead with its recent acquisition.
