When Australian sharemarket returns stumble it is understandable to be attracted by high-interest savings accounts and term deposits – however yanking your money out of the sharemarket is not always the smartest option when superior yields can be made on franked, high dividend paying shares. The secret is finding the stocks set to pay high dividends .
Although bank interest rates are currently paying around 5%, dividend yields for big Australian companies, such as Commonwealth Bank (CBA) are currently over 6%.
Buying shares for dividend yield infers that you don’t have to rely on share price gains to make money. This is important during market sell-offs or flat-lining sharemarkets. Since dividends are distributed from a company’s earnings, even if the stock’s value falls, your dividend yield won’t.
How can one find the highest dividend yielding stocks? A large current dividend yields is no guarantee of strong future dividends. How do you find companies that pay sustainable dividends? There are a couple of techniques that we can use, but first up let’s figure out what we are looking for.
First of all, calculate the dividend cover. i.e., how many multiples of the dividend are earnings. Australian companies distribute dividends to shareholders every six months – usually in April and October. After paying the costs of doing business – wages, equipment, interest on loans and other items – the company pays a share of the residual (its profit) to stockholders as a dividend. The company then reinvests any remaining profit for future growth.Look for dividend cover of 1 to 2 times, but avoid stocks where the dividend cover is less than one. This indicates the company is paying dividends out of previously retained profits or borrowings, and may be distressed.
Next, look at the share’s dividend history. Does it have a history of regular increases to its dividend payout? This suggests a history of good management, and that the company probably has a competitve advantage within it industry/market niche.
Finally, look for forecasts of future earnings and dividends. This will confirm that the share’s performance is likely to continue into the future and will continue to reward stockholders.
The most accurate way to access a list of franked, high yielding shares is a reputable online dividend information service.
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