In the long run, dividends can make a huge difference between success and failure when it comes to investing. In other words, capital gains have the potential to disappoint but, if dividends are paid regularly and are increasing over time then they can turn a poor capital gain into a significantly improved total return.
For example, the ASX has risen by just 19% during the last five years, which works out as an annualised gain of just 3.5%. Although this is higher than the current rate of inflation, it does not appear to provide a sufficient return given the level of risk that is inherent with investing in shares.
In fact, it is less than the current ASX yield of 4.7% and, looking ahead, the challenges facing the global economy in terms of a Chinese slowdown and commodity price falls could cause short-term pressure on the ASX's performance. Therefore, buying stocks with high, sustainable yields could prove to be crucial for investors seeking a generous total return in the years ahead.
Of course, finding the best stocks to achieve a top notch income return is not easy. However, two notable examples are Origin Energy Ltd (ASX: ORG) and Aurizon Holdings Ltd (ASX: AZJ). They are currently experiencing different circumstances, with the former's financial performance being hurt by commodity price weakness – as was highlighted in its recent update which showed that underlying earnings before interest and tax fell by 5% on a per share basis.
Despite this, Origin Energy's dividends are still covered 1.5 times by net profit. This indicates that they are sustainable at their current level and, with Origin Energy currently yielding 5.9%, it has more appeal than the ASX's yield of 4.7%. Moreover, Origin Energy is forecast to increase its bottom line at a rapid rate, with earnings forecast to rise by 27% per annum during the next two years. Despite this, the company has no plans to raise dividends in either financial year 2016 or 2017 which, while disappointing on the one hand, seems to be a sensible stance to take while commodity markets are so uncertain.
Meanwhile, Aurizon continues to go from strength to strength, with the rail freight operator posting a rise in full-year underlying operating profit of 14%. As with Origin Energy, Aurizon's dividends are very well covered at 1.3 times and, despite being forecast to rise at an annualised rate of just 1.1% during the next two years, Aurizon's yield of 4.5% still holds considerable appeal. That's especially the case when the company's management team decided to raise the payout ratio range to between 70% and 100% at its most recent results. This means that, even if profit growth does slow, Aurizon has the scope to raise dividends so as to offer investors in the company a real-terms rise in their incomes.
In addition, both stocks appear to offer good value for money at the present time, with Origin Energy trading on a price to book (P/B) ratio of only 0.74 versus 1.29 for the ASX. And, while Aurizon's P/B ratio of 1.66 is considerably higher than that of the wider index, its excellent track record of having increased earnings at an annualised rate of 28.5% during the last five years means that it appears to be worthy of a premium during a time of considerable uncertainty.
