The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) shed an agonising 4.82% last week, making it the local sharemarket's worst week in three years. The market ended the period just below the 5500 point mark at 5498.5 points and has now fallen more than 8.1% since late April, putting it on the verge of a "technical correction".
The market's incredible run in recent years has mostly been driven by the nation's biggest and best dividend-paying stocks in an otherwise low interest rate environment. But investors are now responding to the idea that the Reserve Bank's latest interest rate cutting cycle may have drawn to a close by selling those very same stocks.
Indeed, no other stocks have inflicted more damage to the ASX 200 over the last six weeks than the Big Four banks – all of which have plunged into the technical correction that the market is desperately trying to avoid.
Westpac Banking Corp (ASX: WBC) has been the group's biggest casualty, plunging a massive 22.2% to trade at $31.19, down from a high of $40.07 just two short months ago. While their losses haven't been quite as severe, Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) are also down 17%, 18.6% and 16.3%, respectively.
The perfect 'buying' opportunity?
Some investors would argue that now is the perfect opportunity to increase their exposure to the Big Banks to position themselves for a significant turnaround, but I would have to disagree.
As we've seen over recent weeks, the market is finally starting to realise just how expensive the banks have become. The stocks were no longer being pushed higher based on basic investing fundamentals (that is, investing for growth in future earnings), but were instead climbing to astronomical heights due to their solid dividends which arguably may not even be sustainable.
Indeed, there are strong headwinds facing the sector, and the Australian economy as a whole, which threaten to derail their ability to continue growing earnings while stricter capital restrictions that are likely to be imposed on the banks could also impact their ability to grow dividends. If that happens, you can be sure more investors will continue to pile out of the banks' shares, resulting in further losses for those left holding them.
Similarly, investors shouldn't count on other 'traditional' dividend stocks such as Telstra Corporation Ltd (ASX: TLS) or Wesfarmers Ltd (ASX: WES) for their dividends, either. Although they have also fallen in price recently, they certainly don't present as 'bargain' opportunities in a market that is now full of reasonable investment prospects.
So where should you turn?
Regardless of whether or not the Reserve Bank does cut interest further (indeed, some economists believe they will fall to just 1.5% in the near future), you can be sure of one thing: low interest rates are here to stay for the foreseeable future.
That means that 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, Wesfarmers or Telstra. 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 generate market-beating capital gains.
Luckily enough for long-term, 'Foolish' investors, the market's recent plunge has opened the door to a number of appealing investment prospects offering outstanding dividend yields, including the following four:
- Woolworths Limited (ASX: WOW) is arguably the greatest stock long-term investors could buy right now. Although it has endured a horror run over the last 12 months or so (to now trade near its lowest price in more than two years), management has devised a long-term initiative aimed at restoring the brand's strength and becoming more competitive with rivals Coles, Aldi and Costco. While investors wait for this plan to play out, they can enjoy its generous fully franked 5.1% dividend yield (7.3% when grossed up for franking credits).
- Like Woolworths, Coca-Cola Amatil Ltd (ASX: CCL) has endured a number of obstacles in recent years but management look to have turned the ship around. Of course, there are still risks facing the business but at $9.54 per share, it seems well worth the effort. Better yet, it maintains a strong balance sheet and is forecast to pay 42 cents per share this financial year, giving it a yield of 4.4% (franked to 75%).
- Scentre Group Ltd (ASX: SCG) owns and operates Westfield-branded shopping centres in Australia and New Zealand and has managed to improve retail sales for 21 consecutive months, despite low consumer confidence levels across the nation. As it continues to revamp its core assets, it should generate stronger returns which could see an increase in dividend distributions over the coming years. As it stands, it expects to distribute 20.9 cents per security for the 12 months ending 31 December 2015, putting it on a forecast yield of 5.4% at its current price of $3.85 per share.
- G8 Education Ltd (ASX: GEM) is a good opportunity for investors looking for both growth, and solid dividend income. The childcare centre operator is rapidly expanding its brand network across Australia whilst ensuring it pays a reasonable price for its new centres. The stock has fallen heavily in price recently (from $5.63 to just $3.75), giving investors the opportune time to buy. Better yet, it pays a quarterly dividend, while it has an expected annual yield of 6.6%, fully franked.
