With the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) breaking below the 5,000 point level this week, self-funded retirees are again being reminded that they can't rely on capital gains to support their living costs.
In fact, given the recent volatility, the importance of dividends is no doubt once again front and centre for many self-funded retirees and self-managed super fund (SMSF) trustees.
Wesfarmers Ltd (ASX: WES) – a dividend stock for the income investor
One way to pick stocks for a portfolio is to rely on averages and to make comparisons. This style of investing is often referred to as relative valuation because an investment option is judged on a relative basis compared to an alternative investment opportunity.
Consider, for example, leading diversified blue chip conglomerate Wesfarmers Ltd.
Analysts are forecasting (according to data provided by Morningstar) a rise in earnings per share from 220.5 cents per share (cps) in FY 2015 to 290.6 cps in FY 2018. Meanwhile, the total dividend is forecast to rise to 249.7 cps in FY 2018.
With Wesfarmers' share price having underperformed against the index over the past 12 months (although not to the same extent as some other blue chip stocks such as Woolworths Limited (ASX: WOW) or BHP Billiton Limited (ASX: BHP) which have experienced falls of around 30% and 40% respectively), investors can currently acquire shares in Wesfarmers for around $37.36 which is close to its 52-week low.
On a relative basis, compared with the market, Wesfarmers' fully franked dividend yield is higher on both an historic basis as well as based on FY 2016 and FY 2017.
While Morningstar's data doesn't provide an estimate for the market's FY 2018 yield, we know that for Wesfarmers the forecast yield is 6.7% which certainly looks attractive in an absolute sense.
