When we think about buying shares for the purposes of making income, or dividends, on our money, we often think of the major banks first and foremost – Westpac, NAB, CBA and ANZ. Major banks have been a reliable and generous source of income for many years.

But banks are not the only sector that investors should be targeting for income.

TheBull took a tour around some investment houses to check out the type of stocks fund managers hold for the purposes of making income for clients.

We hit upon the Armytage Enhanced Leaders Fund, which aims to offer investors a growing cash dividend yield, plus the ability to make capital gains along the way. The fund targets stocks that have below market volatility. Splendid. So, let’s get into the thick of it. Which stocks do they hold?

As of last month, the fund indeed held all of the four major banks listed above – but it also held some miners and large industrials. In fact, BHP Billiton was the fund’s biggest bet. Oil producer Woodside Petroleum, Wesfarmers, News Corporation and Origin Energy were other key holdings. Clearly, this isn’t an exhaustive list. The fund holds between 20 and 35 stocks on average. And yes, that’s a heck of a lot of stocks.

Before you follow their lead – individual investors shouldn’t really be holding more than 12 shares at any given time. Too many stocks, and you might as well buy an index fund or ETF.

So let’s head to the BT Wholesale Imputation Fund. The fund’s objective is to pay 4 to 6 per cent per annum by targeting high dividend-yielding stocks. As of late last month, the fund held big stakes in the major banks – as well as BHP Billiton, Rio Tinto, Wesfarmers, Telstra, Newcrest Mining and Origin Energy.

Another fund that targets high dividend paying stocks is PrimeValue Imputation Fund. As at March 2001, the fund’s top five holdings were BHP Billiton, followed by mining-services company Monadelphous, NAB, Wesfarmers and Seven West Media.

In this climate, the fund is targeting defensive stocks, preferably in mining services and consumer staples. The manager expressed concern that the global economy could slow in the second half of 2011, and that the high Australian dollar may remain rather jacked up for much of this year – which would be bad news for consumer and discretionary sectors. That’s why its bet are on resources, engineering, construction and health services, which they believe should remain reasonably buoyant.

The table below shows the dividends and dividend yield for the companies mentioned above. As you can see, the banks indeed pay some of the most generous dividends in the market, but other companies like BHP Billiton and Woodside Petroleum are not too far behind. All stocks below offer 100 per cent franking, which means that you receive the full 30 per cent tax rebate when buying these stocks. Also good news.

Remember that dividends paid (in cents) and dividend yield are not one and the same. Dividends relate to actual dividends paid to shareholders, whereas dividend yield compares the dividend payments to the share price of the stock. So on this measure, if two stocks distribute the same dividends – the stock with the lower share price will boast the higher dividend yield. 

While this may appear the better investment, it may not be. A dragging share price can sometimes be indicative of darker clouds on the horizon.

COMPANY Dividend (cents) (June 2010) Franking % Dividend Yield %
Commonwealth Bank (CBA) 290 cents 100 6
ANZ Bank (ANZ) 126 cents 100 5.3
National Australia Bank (NAB) 152 cents 100 6
Westpac Bank (WBC) 139 cents 100 6
BHP Billiton (BHP) 102.1 cents 100 2.6
Rio Tinto (RIO) 106.30 cents 100 1.3
Woodside Petroleum (WPL) 105 cents 100 2.6
Newcrest Mining (NCM) 25 cents 0.7
Origin Energy (ORG) 45.9 cents 100 3.4
Telstra (TLS) 28 cents 100 8.6
Wesfarmers (WES) 125 100 4.4
Seven West Media (SWM) 45 100 6.9
Monadelphous (MND) 83 100 6.5


>>Back to the newsletter to view other articles – June 25th 2011

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