Dividend paying shares are still in vogue.
Indeed, unless you've got heaps of cash to invest in property for a meagre return, or are happy copping interest rates of two or three percent on a term deposit; dividend paying stocks are your best option.
Dividend yields over five percent are easily obtainable from reputable blue chip stocks, some even come with full franking. That means, investors get the additional benefit of franking credits – a boon for Self-Managed Superannuation Funds.
Chuck in a 50% discount on capital gains tax if you hold your investment for more than a year, and its little wonder why so many individuals choose the sharemarket as a reliable means to generate sustainable wealth.
Three stocks widely held for their dividend income (including full franking!) are Woolworths Limited (ASX: WOW), National Australia Bank Ltd (ASX: NAB) and Medibank Private Ltd (ASX: MPL).
Woolworths – gross dividend yield: 7.3%
Shares of Woolworths, Australia's most profitable supermarket chain, have fallen 26.3% over the past year over threats of increased competition from rivals Coles and Aldi. However, investors appear to have overlooked the fact Woolies has increased its annual dividend every year since it listed on the ASX in 1993. There's also concerns over Woolworths' unprofitable Masters home improvement business.
However, these concerns now appear to be overdone and Woolworths valuation has become much more compelling at its current market price of $27.10.
National Australia Bank – gross dividend yield: 8.86%
Over the past three months, NAB shares have fallen more than 16%. Based on its current price of $31.80, NAB has the largest fully franked dividend yield of the Big Four banks.
The catalysts behind the selloff could be the high valuation of its shares, or a recent decision to raise $5 billion by issuing shares. The money raised will be to fund the divestment of its troubled U.K. subsidiary, Clydesdale Bank, and bolster its capital position.
NAB's bold move may prove worthwhile in time, but with growing competition in the local banking sector and rich valuations placed upon their shares, none of the big banks are a good buy at this time.
Medibank Private – gross dividend yield: 5.06%
Despite being a roaring success for myopic investors, shares of Medibank are starting to come back to earth following its hotly anticipated market debut in 2014. Although Australia's largest private health insurer has made good progress on some of its prospectus forecasts, it still has work to do in removing costs from the business.
Medibank, like NAB, is operating in a growing but intensely competitive market. Therefore, its share price will only hold up if it can deliver on its promised cost savings whilst also maintaining market share.
Given the challenges ahead, and its current valuation, I think the risk-reward trade-off is not tilted in Medibank shareholders' favour at today's prices. Currently trading on a price-earnings ratio of 23x and price-book ratio over 4.2x, investors would be wise to exercise caution before hitting the buy button.
A better buy than Medibank
