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Selling pressure continued this week despite the extension on bans on short selling in France, Italy, Spain and Belgium. The bans were put in place in an attempt to put an end to the rout on European bank shares, which had plummeted 24% in just three weeks. With the ban extended to shorting indices such as France’s CAC40 traders moved on to the DAX, causing a flash crash in Germany on Thursday and further falls on Friday, although the DAX did manage to eke out a 1.0% gain for the week. While the CAC40 has fallen just 0.3% since the ban was put in place, DAX futures have lost almost 6% and brokers believe that there’s plenty more sellling to come. It seems that whatever measures are put in place to prop sharemarkets up, the bears are firmly in control – for the moment, at least.

With global markets displaying a downward bias, buyers with a short-term focus are simply sitting on the sidelines. Meanwhile long-term investors are coming to terms with the prospect of meagre gains, forcing them to look toward dividends as the key to their investment returns. And with the overall Australian sharemarket providing a dividend yield of 5%, investment manager Fidelity believes that now is the time for long-term investors to jump into dividend paying stocks.

“The Australian market as a whole provides a significant dividend investment play – a dividend yield of about 5%,” says Paul Taylor, Head of Australian Equities at Fidelity and Portfolio Manager of the Fidelity Australian Equities Fund. Taylor believes that this is a really sustainable yield and this makes the Australian market particularly attractive. ‘Even if we stay at this low valuation level we’re still going to get pretty good returns from the earnings growth as well as that dividend yield,’ he says.

As a case in point, shares in the four major banks provide an average dividend yield of 7% plus franking credits – superior to the banks’ term deposit rates. That said, it must be noted that with shares there are the twin risks of capital loss and lower future yields. With the pressure on bank stocks worldwide and the threat of GFC Mark II in the air, it would be a brave soul to make a play on bank stocks based purely on dividend yield while ignoring the risks. Not only is credit tightening around the globe, but Aussie banks are particularly at risk to any downturn in the property market. 

 Comparative returns  %
 Average Australian term deposit rate for two years  5.7
 S&P/ASX 200 Accumulation Index  5.0
 Big 4 Banks (CBA, NAB, ANZ, WBC)  7.0 (+ franking credits)

Source: Fidelity, Mozo and Bloomberg as at 18 August 2011

Fidelity points out that as interest rates are lowered around the world to stimulate slowing economies, bank deposit rates and government bond returns are expected to drop further, making a host of dividend paying equities – such as Telstra, Map, Goodman and Westfield – more attractive. (In fact, 10-year Treasuries yields in the United States dipped below 2% for the first time since 1954.)

Ideally investors want to pick undervalued stocks that would provide both a high dividend yield and share price growth, although this is easier said than done. Telstra, QBE, IOOF Holdings and Westfield are all popular stocks with brokers we surveyed, what’s more they offer yields of more than 7%. On the flipside there are several stocks that brokers advise to avoid, despite the high yield on offer. These include Macquarie, Tabcorp, David Jones, Goodman Fielder and Mirvac. The table below outlines the yield and recent broker calls for each of the stocks.

The Australian market is currently sitting on a valuation level of around 10 times earnings and about a 5% dividend yield, which Fidelity believes is very attractive from both an absolute valuation level and also against Australia’s own historic levels. ‘Traditionally the Australian market trades at closer to 14 – 15x,’ says Taylor. ‘While I don’t think the Australian market is going to go from 10 back up to 14-15x anytime soon, I think maybe we stay at that 10-11x and returns come from the dividends that get paid, as well as the earnings growth in the market.’

Taylor belives that we are in a very different environment to that of the original global financial crisis (GFC), and that we’re coming in to this slowdown in a much better position. ‘Corporates are now in a much stronger position and have spent a lot of the time on strengthening their balance sheets,’ he says, pointing out that they have raised the capital and are still quite profitable. ‘In fact with a few of the larger caps, you could probably argue that maybe they’re too strong – as we are seeing share buy backs from a range of larger corporates.”

Fidelity is overweight Rio Tinto, Iluka, MAp Airports, Commonwealth Bank, Telstra and Oil Search, which it believes are attractively valued, offer great dividends and also a strong growth profile. “So even in this environment we’re finding great opportunities, great companies at great prices – and as a fundamental investor that’s what we’re really trying to find,’ he says. ‘Picking the Australian market up at 10 times earnings with 5% dividend yield is a really good long-term investment opportunity.’


 Company  Stock code  Industry  Dividend Yield (%)  Broker Calls
 Tabcorp TAH  Consumer Services  15.74

 High Risk Buy – Citi

 Sell – Macquarie, Wilson HTM

 Seven West Media  SWM  Media  13.62  Buy – PrimeValue
 DUET Group  DUE  Energy  12.50  Sell – State One
 Goodman Fielder  GFF  Consumer Goods  12.27  Sell – RBS, Intersuisse
 David Jones  DJS  Consumer Services  10.28

 Hold – Patersons

 Sell – Shadforths

 Myer  MYR  Consumer Services  10.07

 Buy – Credit Suisse

 Hold – State One

 Tatts  TTS  Consumer Services  9.51  Hold – WilsonHTM
 Australand  ALZ  Financial Services  9.42  Sell – Macquarie
 QBE Insurance  QBE  Financial Services  9.36

 Buy – Macquarie, Shadforths, RBS, Citi

 Sell – Patersons

 Telstra TLS  Telecommunications  9.15

 Buy – RBS, UBS, Credit Suisse, William Shaw, Deutsche

 Hold – WilsonHTM, Austock, Shadforths, Intersuisse, Alpha

 SP AusNet  SPN  Energy  8.79  –
 Spark Infrastructure  SKI  Energy  8.70  –
 APA Group APA  Energy  8.60

 Buy – RBS, Patersons, Credit Suisse

 Hold – Morningstar

 Perpetual  PPT  Financial Services  8.48

 Buy – Shadforths, E.L & C. Baillieu

 Hold – Goldman Sachs

 Sell – Deutsche

 Stockland SGP  Financial Services  8.35  Buy – Morningstar, Merrill Lynch, Citi
 Macquarie MQG  Financial Services  7.75

 Buy – Morningstar

 Sell – Patersons

 Mirvac  MGR  Financial Services  7.50  Sell – Alpha Broking
 CFS Retail Property Trust CFX  Financial Services  7.45  Buy – JP Morgan
 Westpac  WBC  Financial Services  7.43  Buy – Morningstar, Patersons
 Westfield WDC  Financial Services  7.35

 Buy – JP Morgan, Merrill Lynch, State One, Citi, Deutsche, UBS, Credit Suisse

 Sell – William Shaw

 AMP  AMP  Financial Services  7.32  Buy – William Shaw, E.L & C. Baillieu
 Charter Hall Office REIT  CQO  Financial Services  7.21

 Buy – Credit Suisse

 Sell – WilsonHTM

 IOOF Holdings  IFL  Financial Services  7.17  Buy – Mornginstar, Patersons, RBS
 National Australia Bank  NAB  Financial Services  7.14  Buy – WilsonHTM
 OneSteel    Industrial Materials  7.09  Buy – Perennial
 Consolidated Media Holdings  CMH  Media  7.05  –
 Bank of Queensland  BOQ  Financial Services  7.05

 Hold – Patersons

 Sell – Austock

 Bendigo and Adelaide Bank  BEN  Financial Services  6.86  Outperform – Credit Suisse
 Commonwealth Bank  CBA  Financial Services  6.85

 Buy – Shadforths, Patersons

 Hold – WilsonHTM

 Investa Office Fund  IOF  Financial Services  6.78  –
 ANZ Banking  ANZ  Financial Services  6.75

 Buy – RBS, Perpetual

 Sell – Novus Capital

 Platinum Asset Management  PTM  Financial Services  6.68  –
 Metcash  MTS  Consumer Services  6.65  Hold – Patersons
 Dexus Property Group  DXS  Financial Services  6.61  –
 Harvey Norman  HVN  Consumer Services  6.52

 Outperform – Credit Suisse

 Sell – Lincoln

 Commonwealth Property  CPA  Financial Services  6.32  –
 Minara Resources  MRE  Industrial Materials  6.29  –
 ASX Limited  ASX  Financial Services  6.24  –
 Adelaide Brighton  ABC  Industrial Materials  6.21  Invesco, Deutsche


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