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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
 TabcorpTAH 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

 TelstraTLS 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 GroupAPA 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

 StocklandSGP Financial Services 8.35 Buy – Morningstar, Merrill Lynch, Citi
 MacquarieMQG Financial Services 7.75

 Buy – Morningstar

 Sell – Patersons

 Mirvac MGR Financial Services 7.50 Sell – Alpha Broking
 CFS Retail Property TrustCFX Financial Services 7.45 Buy – JP Morgan
 Westpac WBC Financial Services 7.43 Buy – Morningstar, Patersons
 WestfieldWDC 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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