It's no secret that investors love dividends.
They're generally paid on a semi-annual basis out of the company's profits and provide owners with a steady stream of income.
Some investors live off the proceeds, while others reinvest them to enjoy the full benefits of compounding in the long-run.
Indeed, Australian investors are even luckier in that the dividends they receive often come with tax benefits in the form of franking credits.
It is these companies that receive the most attention from dividend investors, and deservedly so.
But the truth that often escapes investors is that dividends are by no means guaranteed. Not even those offered by the biggest blue-chip companies you might have thought were like cast-iron.
Take Woolworths Limited (ASX: WOW), which offers a 5.8% fully franked dividend yield, as an example.
The retail giant is without a CEO. It's losing money hand-over-fist in its Mastersand Big W ventures. And its supermarket margins are coming under intense pressure as it tries to match rivals such as Coles and Aldi on grocery prices.
It gets worse…
Woolworths recently warned of a 35% decline in first-half net profit, and some analysts think its full-year dividend could decline by something similar.
No wonder investors don't want a bar of Woolies right now…
BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are in a similar boat.
Both offer enticing, fully franked dividends which should be enough to make investors' mouths water.
Yet both are being ignored…
Same with the big four banks, including Australia and New Zealand Banking Group (ASX: ANZ) which offers a trailing 6.9% dividend yield, also fully franked.
Mark my words, twelve months ago, investors would not have let that happen…
Back then, high-yield dividend stocks, especially those which came with franking credits attached, were snapped up in a heartbeat by income-hungry investors wanting to beat the low interest rate environment.
Indeed, yields like that can only be ignored by investors for three reasons:
- They think they can get better returns elsewhere — with interest rates stuck at 2%, and likely to fall lower in the New Year, that's highly unlikely
- They think the shares have further to drop – the capital losses are expected to offset any potential dividend gains; or
- They think the dividends are unsustainable
Indeed, dividends can be unsustainable for a multitude of reasons.
Maybe the company is facing sector-specific headwinds, like BHP or Rio Tinto…
Maybe tougher regulations will restrict capital outflow, as could eventuate with the banks…
Maybe the company will need to commit more cash to reinvesting in itself. Or maybe they'll need to improve their credit rating by retaining more cash, just as Woolworths is expected to do…
The point is, these companies are typically the first point of call for dividend investors. But while they've traditionally been seen as the most reliable, they're not necessarily the best options today.
Instead, investors need to look beyond the usual suspects to find the greatest opportunities, which can often be those companies in the mid-cap range.
Unlike the banks and miners, they're the companies operating in growing industries or with strong growth prospects of their own.
Some have the potential to grow earnings considerably over the coming years and many generate the majority of their earnings overseas, taking advantage of the weak Australian dollar.
Better yet, many also have the capacity to grow their dividends, essentially multiplying the benefits of exponential growth for investors who choose to reinvest their proceeds.
Indeed, it is these kind of companies that our resident dividend expert, Andrew Page, seeks to uncover for members of Motley Fool Dividend Investor.
Take BWP Trust (ASX: BWP), formerly known as Bunnings Warehouse Property Trust, as a perfect example.
BWP has generated fantastic shareholder returns over the last decade and, with a quality and profitable major tenant in Bunnings Warehouse, that trend should continue well into the future.
The stock offers a 5% dividend yield. Although there are no franking credits attached per se, it's likely you'll be eligible for other tax benefits as a shareholder…
More details are revealed in Andrew's full "buy" recommendation of the company.
Indeed, by subscribing to Motley Fool Dividend Investor today (at our discounted price of just $99 for the first 12 months, mind you), you can gain immediate access to this recommendation – and every other dividend stock Andrew has recommended!
Once inside, you'll note that not one bank or miner is yet to make the scorecard.
Why?
Because right now, there are simply better opportunities to take advantage of…
Companies that aren't necessarily of 'blue chip' status. Those that aren't widely followed by the financial media yet possess strong balance sheets and solid growth prospects.
These are the ones that Foolish investors are buying and profiting from.
