With the S&P/ASX200 (ASX: XJO) (Index: ^AXJO) nearing 6,000 points, the Australian share market is not at bargain prices.
Indeed the market as a whole is trading at a price-earnings ratio of nearly 17.
But, given the headwinds facing the mining and resources sector (which is dragging on the ASX), the valuation of industrial companies is even higher!
At these high levels, investors should be careful with their stock picks.
Sure, in this low interest rate environment, dividends are great. But a falling share price can quickly wipe out the perceived benefit of a twice a year dividend yield. Just ask investors in Fortescue Metals Group Limited (ASX: FMG), which has a share price down 62% in the past 12 months!
Moreover, it is not uncommon for dividends to be cut from time to time.
In fact, Australian dividend stocks Telstra Corporation Ltd (ASX: TLS), Coca-Cola Amatil Ltd (ASX: CCL) and National Australia Bank Ltd (ASX: NAB) have been forced to cut their annual dividends at least once in the past decade.
Should you buy Telstra, NAB and Coca-Cola Amatil Ltd shares now?
However, as has been well documented in financial media over the past 24 months, interest rates are likely headed lower in the near future as a result of a resources sector slowdown.
Therefore now could be a better time than ever to consider adding these dividend giants to your share portfolio.
Telstra shares have risen over 100% in the past five years, as investors returned to equity markets in the wake of the Global Financial Crisis. However, at over $6.30 per share, Telstra's valuation has become stretched. Indeed investors are best off leaving it on their watchlist and to avoid buying in, for now, until we witness a meaningful setback in share price.
Australia's biggest bank by assets, NAB, has been on a tear in 2015, with its shares price rising 18% despite huge provisions and write-offs in 2014 and a raft of bad publicity. This compares to a 10% return from the market. Whilst NAB shares are currently offering a dividend yield of 5%, fully franked, investors should take note of the considerable headwinds facing the local economy and the cyclicality of big bank profits before buying in. In my opinion, at today's prices NAB shares are not a buy.
At the weekend, there was more distasteful news about Coca-Cola Amatil's ongoing strategic turnaround, with its venture into flavoured milk proving tougher than first planned. However, after taking a beating in 2013 and 2014, Australia's distributor of Coca-Cola and beam-branded products doesn't have to shoot the lights out to make its current valuation appealing to investors. At today's prices it appears a worthwhile addition to risk-averse investors' portfolios.
