While the ASX has disappointed during the course of 2015, with it falling by 2% year-to-date, it still trades on a fairly generous valuation. For example, it has a price to earnings (P/E) ratio of 15.2 and many investors may, therefore, feel as though it is somewhat expensive given the outlook for the wider economy.
For example, savage commodity price falls, weak Chinese economic data and disappointing domestic data are all a reality for the ASX at the present time. And, while the long run may hold the promise of a much improved outlook, the short term could prove to be a major challenge for investors.
As a result, it could pay to invest in stocks that trade at a discount to the wider index. And, on this front, the likes of Australia and New Zealand Banking Group (ASX: ANZ) and Insurance Australia Group Ltd (ASX: IAG) hold considerable appeal. For example, ANZ trades on a P/E ratio of 11, while IAG's PE is also below the ASX's at 14.5, with the two companies thereby having the potential for an upward rerating over the medium term.
However, they both have excellent income prospects, too. In the case of ANZ, it currently has a fat, fully franked yield of 6.2%, which is well ahead of the ASX's yield of 4.6%. Furthermore, ANZ has an excellent track record of increasing dividends on a per share basis, with them rising at an annualised rate of 11.8% during the last five years.
And, while more onerous capital requirements for major banks are a reality, ANZ is still expected to increase dividends by 2.5% per annum over the next two years, which means that it is likely to offer a real terms rise in shareholder payouts. In fact, the prospects for ANZ's dividend growth outlook were given a boost just this week then the bank reported a 4% rise in quarterly cash profit, with its increased diversity (via the Super Regional Strategy) proving to be a major asset and setting the bank up for a strong medium term performance outlook.
Likewise, IAG beats the ASX's yield with its yield currently standing at 4.9% (fully franked), with the company's dividends rising by 4.4% per annum during the last 10 years. Looking ahead, they are set to increase by 13.6% in the current financial year, which could act as a positive catalyst on the company's share price and help it to turn the tables on the 7% fall that has been recorded over the last year.
As well as being cheap and excellent dividend stocks, ANZ and IAG also offer greater stability than the ASX. Clearly, when the economy is booming, share prices are rising and investor confidence is growing, relatively few people are interested in a company's beta. However, with the outlook for the ASX being so uncertain and there being the potential for major disappointment via commodity price falls and a weak Chinese economy, the volatility of stocks matters much more. So, with betas of just 0.9 (ANZ) and 0.6 (IAG), the two stocks could gain in popularity as a result of their more stable shareholder experience, which could act as a positive catalyst and push their share prices higher.
