With valuations not looking overly attractive and the economic outlook both domestically and globally looking sanguine, there doesn't appear to be much impetus for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) to rally significantly in the near term.
Assuming a continuation of lacklustre equity market returns coupled with an ongoing low interest rate environment has led many investors to fill their portfolios with high quality, income stocks.
It's an understandable strategy, however…
If you sustain capital losses from an investment which are greater than the dividends received, then unfortunately you'll end up worse off no matter how attractive the dividend yield is.
This situation becomes all the more serious if you paid an excessive price for a stock, leading not just to a temporary "on paper" capital loss but perhaps something much more permanent.
To reduce this risk to one's wealth, when choosing high yield shares it's vitally important to determine not just the sustainability and outlook for future dividends but also to determine a conservative estimation of underlying intrinsic value.
Here are three companies which are forecast to grow their earnings and increase their fully franked dividends.
Importantly, it could reasonably be argued that the share prices of these three stocks are not presently expensive.
- Telstra Corporation Ltd (ASX: TLS): For financial year (FY) 2016, Telstra is forecast to earn 34.8 cents per share (cps) and pay a fully franked dividend of 31.5 cps. Based on these forecasts, the stock is trading on a forward price-to-earnings (PE) ratio and dividend yield of 14.8x and 6.1% respectively.
- IOOF Holdings Limited (ASX: IFL): Consensus forecasts for FY 2016 suggest EPS and dividends of 63.1 cps and 56.2 cps respectively. With IOOF's share price trading at $8.88, this implies a PE and yield of 14.1x and 6.3% respectively.
- Commonwealth Bank of Australia (ASX: CBA): Australia's largest bank is forecast to increase EPS to 562.3 cps and to increase its dividend to 420 cps in FY 2016. With the stock being sold down 16% in the past 12 months, investors can currently purchase CBA on a PE of 13.6x and yield of 5.5%. (source: Thomson Consensus Estimates)
