Pop quiz: How much money do Australian households have in term deposits?
$200 billion? Higher…
$400 billion? Higher…
$600 billion!? Higher…
$714 billion to be precise.
Indeed according to APRA's Monthly Banking Statistics, Australians had $714 billion in term deposits at March 31 2015. Up from $711 billion a month earlier.
To be honest I think that's surprising. Because some term deposits from the big banks are offering returns of just 2.65% per year!
I mean, who'd be satisfied with keeping the majority of their money tied up earning that amount?
No doubt, by now, you're probably thinking: Why are so many Australians copping around 2.5% when they could easily get a reliable dividend greater than 5% by buying high-yield stocks like Woolworths Limited (ASX: WOW), Telstra Corporation Ltd (ASX: TLS) or Westpac Banking Corp (ASX: WBC)?
The answer: risk.
Despite their size, each of these dividend stocks aren't immune from experiencing sharp price falls. Shareholders can be left high-and-dry.
However, if you are willing to invest long term, can stomach volatility and have a healthy cash balance behind you; why not consider adding some sharemarket exposure?
Let's take a quick look at Woolies, Telstra and Westpac to see which one's right for you… if any!
Woolworths
As Australia's most profitable supermarket chain, you'd be mistaken for thinking investors are prepared to pay an above-average price for Woolies stock. Indeed, after falling 21% in the past year it appears some investors are still cautious. However, I believe Woolies shares have moved into a much more compelling valuation range and loaded with their current 4.8% fully franked dividend yield, it could be a great buying opportunity for a savvy — long term — investor. Whilst I probably wouldn't call it a bargain, investors could do far worse than add Woolies shares to their portfolios for its dividend yield and relative safety.
Westpac
Unlike Woolies, Westpac has risen strongly in the past 12 months. Well, at least until it reported its results earlier this month – it's already down 8% in May! Nevertheless since almost going bust in 1991 the banking giant has enjoyed over two decades of economic and property price growth, raising dividends very quickly over many years. Unfortunately, looking ahead, the medium-term forecasts for unemployment, credit growth and competition in the banking sector don't bode well for the outperformance of Westpac shares. Personally, I'm avoiding Westpac shares for the time being.
Telstra
As the leader of Australia's telecommunications industry, Telstra has continued to generate huge annual cash flows. These have been used to reinvest in new growth areas and/or pay big dividends to shareholders. Whilst it is undoubtedly one of the best income stocks on the market, it's hard to envisage Telstra shares beating the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) from today's prices after more than doubling over the past five years. I'm on record as saying I'd consider buying Telstra shares around $4.00. Currently priced at $6.18 I think Telstra is a hold.
Buy, Hold, or Sell?
I'd rate Westpac as a sell today given its high share price and subdued growth outlook, but I'd happily hold Telstra for its reliable dividend yield and modest long-term capital gains.
