Following the crash earlier this week, I thought it would be a great time to find some income stocks trading at a discount.
By income stocks, I mean stocks paying great fully franked dividends.
There are three main components to the list I've compiled below.
- The dividend yield, which is the income component
- The dividends must be fully franked, which will remove the taxation component
- The price to earnings ratio (P/E), which is the valuation component
What is a dividend yield?
The dividend yield tells investors how much they are earning on a common stock from the dividend alone based on the current market price.
The Dividend Yield Ratio is one of the most commonly quoted financial ratios and shows how much a company pays out in dividends each year as a percentage of its share price. It's expressed as a percentage and is calculated by dividing the annual dividends paid out by the current share price.
| Dividend Yield = | annual dividends per share |
|---|---|
| current share price |
| Example | |
|---|---|
| Interim dividend | $1.00 |
| Final dividend | $1.50 |
| Share price | $35.60 |
| (1.00 + 1.50) / 35.60 = 0.07 or 7.0% | |
Considering the yield offered by many large ASX-listed companies is higher than the current RBA Cash Rate of 2.0%, investing for dividends can be an attractive strategy for the conservative portion of an investor's portfolio.
There are two types of dividend yields based on time period. Put simply, a 'trailing yield' is calculated using the total dividends over the past year, and a 'forward yield' is some estimation of the future dividend yield of a stock.
I've used the trailing yield over the past 12 months.
What is the price to earnings ratio (P/E)?
The price-to-earnings ratio, or P/E ratio, is a valuation multiple. It is defined as market price per share divided by annual earnings per share.
As with dividends there are two types of P/E ratio based on time period. Put simply, the trailing P/E ratio uses net income from the past 12 months, and the forward P/E ratio uses estimated net income over next 12 months.
I'm using a "trailing P/E" for the past 12 months.
What does fully franked mean?
Fully franked dividends mean you don't need to pay tax on the dividends you receive because it's already been paid for by the company.
Dividends are paid out of profits which have already been subject to Australian company tax which is currently 30%. This means that shareholders receive a rebate for the tax paid by the company on profits distributed as dividends.
WARNING! Investors in stocks paying dividends also need to consider the capital risk and, just because a company is paying dividends doesn't mean these dividend payouts are sustainable.
Now that you understand the dividend yield, P/E ratio, and fully franked dividends, here's the criteria I used:
Market Cap – Companies with a market cap over $16 billion – We only want the biggest companies
Trailing P/E ratio – Stocks that are selling on a price to earnings ratio (P/E) of less than 15
Trailing Div Yield % – The higher the better for income investors
All stocks are 100% fully franked.
Here's my list of 8 fully franked income stocks selling at a discount.
Results are in dividend yield order, highest to lowest:
| Company | Code | P/E Ratio | Price | Total Dividends | Yield | Franking |
| Woodside Petroleum Limited | (ASX:WPL) | 9.29 | 31.49 | 2.73** | 8.70%** | 100.00% |
| BHP Billiton Limited | (ASX:BHP) | 9.89 | 24.16 | 1.65 | 6.80% | 100.00% |
| Suncorp Group Ltd | (ASX:SUN) | 14.96 | 13.1 | 0.88 | 6.70% | 100.00% |
| Australia and New Zealand Banking Group | (ASX:ANZ) | 10.98 | 28.66 | 1.81 | 6.30% | 100.00% |
| National Australia Bank Ltd. | (ASX:NAB) | 13.37 | 31.62 | 1.98 | 6.20% | 100.00% |
| Westpac Banking Corp | (ASX:(WBC) | 13.3 | 31.75 | 1.85 | 5.80% | 100.00% |
| Commonwealth Bank of Australia | (ASX:CBA) | 14.16 | 76.64 | 4.2 | 5.50% | 100.00% |
| Woolworths Limited | (ASX:WOW) | 14.14 | 27.11 | 1.39 | 5.10% | 100.00% |
Source: ASX.com.au
**Woodside Petroleum Limited made a net profit of $US679 million ($A924.63 million) for the six months to June 30, down from $US1.1 billion for the same period a year ago. In response to the drop, Woodside cut its fully franked interim dividend more than 40 per cent to US66 cents/AUD89 cents per share. This dividend figure was recalculated to include the new amount.
