With interest rates having fallen during the course of 2015 and the outlook for the Aussie economy highly uncertain, many investors are understandably turning to higher yielding, defensive stocks at the present time.
Such companies, of course, help to fill the void created by relatively low returns on cash balances which, given the outlook for the Aussie economy, seem likely to worsen as the RBA adopts an increasingly loose monetary policy to try and stave off a recession. The defensive aspect of such companies also means that they could offer stability and a degree of resilience in the face of economic headwinds.
One company which has been regarded as a top-notch dividend stock in recent years is Telstra Corporation Ltd (ASX: TLS). Its current yield of 5.9% (which is fully franked) is 130 basis points higher than that of the ASX and, with dividends having risen by 3.4% on a per share basis in its most recent financial year, Telstra has offered a real-terms increase in income for its investors, too.
Last year, though, Telstra's dividends were covered only 1.13 times by profit, which indicates that unless profit begins to grow at a faster rate than the 2% per annum rate achieved over the last five years, Telstra may struggle to raise shareholder payouts in future. After all, the company must reinvest a proportion of profit for future growth opportunities.
On this front, however, Telstra seems to be very well-positioned, with the company being forecast to increase its earnings at an annualised rate of 7.6% during the next two years. A key reason for this is the company's pivot to Asia, where there is a tremendous growth opportunity for telecommunications products and services, with Telstra aiming to generate at least a third of its sales from the region within the next five years.
And, with the Chinese middle-class population set to rise by 326 million between now and 2030, the increased focus on Asia is likely to sustain a higher future growth rate for Telstra over the longer term, too.
Such impressive growth prospects are set to allow Telstra to increase dividends per share at an annualised rate of 3.2% over the next two years. As well as putting Telstra on a forward yield of 6.1%, the fact that earnings are set to outstrip dividends means that Telstra's dividend coverage ratio is due to improve, with it expected to reach a healthier 1.23 in financial year 2017.
As well as a high yield and bright growth prospects, Telstra also offers defensive qualities. This is due to be amplified by the company's move into healthcare, which is less positively correlated with the performance of the wider economy and, therefore, should provide Telstra with a more resilient and stable income stream. This, plus a beta of just 0.5, indicates that Telstra is likely to offer a more defensive shareholder experience than the wider index, thereby making it a sound buy given the uncertain outlook for the ASX.
