The Australian sharemarket has fallen considerably in recent weeks, led down by the very same high-yield dividend stocks that drove it to multi-year high levels just recently.
Given the measly returns on offer from 'risk-free' investments such as bonds and term deposits, investors have piled their money behind large corporations offering generous dividends. Indeed, this buying frenzy saw many of the nation's most popular and widely held stocks soar to unprecedented levels. Although this effect is now being reversed as investors sell those stocks en masse.
This has become most evident in each of Australia's 'Big Four' banks, which have all plunged into a "technical correction". Westpac Banking Corp (ASX: WBC) has been hit the hardest by far with its stock down 19.5% since hitting a peak of $40.07, while Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have all fallen slightly more than 14% since their respective highs.
Telstra Corporation Ltd (ASX: TLS) and Wesfarmers Ltd (ASX: WES) find themselves in similar predicaments. Telstra, which last traded at $6.13, has fallen 9% since early February and Wesfarmers is down 7.5% in roughly the same period of time.
While some investors would argue that now is the opportune time to buy these stocks, I would have to disagree. Investors need to remember that each of these stocks have arguably become overpriced (some significantly so).
So where should investors turn to?
Although most analysts doubt the Reserve Bank will cut interest rates any lower – especially not before November this year – interest rates will remain low for the foreseeable future.
The fact is the RBA sees it as a 'necessity' that the Australian dollar weakens against the US greenback, while the questionable outlook for our economy doesn't support the notion of an interest rate hike, either.
With that in mind, investing in high-yield dividend stocks remains one of the best ways to grow your wealth over the coming years. But as I explained above, investors can't just throw their money behind the traditional dividend stocks such as the banks, Telstra or Wesfarmers. They need to be smarter about their decisions, and seek out companies that not only have the potential to sustain their dividend distributions, but those that can also deliver market-beating capital gains.
Right now, Wesfarmers' primary rival Woolworths Limited (ASX: WOW) is one of your best bets. Historically, the company has proven its ability to grow revenues and earnings while it has also consistently increased its dividends per share. However, recent concerns have seen the share price flop to a near three-year low, offering long-term investors the perfect opportunity to buy.
At $28.15, the stock offers a compelling 4.9% fully franked dividend yield, which equates to 7.1% when grossed up for tax credits.
Coca-Cola Amatil Ltd (ASX: CCL) is another great bet for solid dividends. While investors would prefer to forget the last two years or so, management appears to be getting the company back on the right track which could lead to significant gains in the share price over the coming years. At the same time, it offers a very generous 4.2% dividend yield (franked to 75%) which is expected to grow as earnings recover.
Like Coca-Cola Amatil, QBE Insurance Group Ltd (ASX: QBE) has taken shareholders on a rollercoaster ride in recent years but appears to have finally bottomed out. The stock has surged 34% since the beginning of February, yet remains at a 32% discount to its price five years ago. At $14.00 per share, the stock is offering a forecast 3.5% dividend yield (fully franked), which is expected to increase considerably over the next two or three years.
