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When capital gains are increasingly hard to come by, the trusty dividend becomes ever more important to investors. The trick is to ensure that dividends are forthcoming and aren’t cut as economic conditions worsen.

For this reason investors should target companies with sound earnings, sustainable dividends and manageable debt. Companies with these traits are more likely to survive a market correction and return a reliable and often growing income stream to investors.

Blue chip companies’ dividend yields grossed up by franking credits often provide higher returns than the standard term deposit of 6 per cent, without accounting for a stock’s potential capital growth. Today, four brokers offer six top income stocks they believe should be part of any balanced portfolio, and any market downturn can provide an opportunity to buy in at a discount.         

Telstra (TLS)

 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Share price: $3.14
Latest full year dividend: $0.28
Dividend Yield: 8.90%
Market capitalisation: $39,071 million
Price/earnings ratio:  11.64 times

Telstra shareholders overwhelmingly voted in favour of decommissioning its copper network in exchange for $11 billion as part of the National Broadband Network deal. Although 99 per cent of Telstra shareholders voted in favour, the deal still needs to be approved by the Australian Competition and Consumer Commission.

Telstra also confirmed it would retain its fully franked dividend at 28 cents a year for the next two years. The telco giant’s share price held up well during the recent correction and John Rawicki, of Ord Minnett, expects it to go higher. He is forecasting a dividend yield of 9.2 per cent for 2012 on the back of stronger net operating cash flows increasing to $8 billion.

“Telstra is in a strong position with manageable debt supported by increasing cash flows generated from growing mobile and internet businesses,” he says. “It’s a great dividend stock with potential capital growth built in.”

Charts: Telstra Limited

More news: Telstra Limited

 

Monadelphous Group (MND)

 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Share price: $18.97
Latest full year dividend: $0.95
Dividend Yield: 5.2%
Market capitalisation: $1,682 million
Price/earnings ratio:  17.10 times

Peter Russell, of Russell Research, is keen on engineering firm Monadelphous Group. The company is a leader in building and maintaining projects for iron ore, oil, gas and infrastructure operators. Russell says Monadelphous has earned an enviable reputation for consistently delivering growth and rewarding investors. “Its leadership team has produced a decade of year-on-year records despite the global financial crisis,” Russell says.

For the year to June 30, 2011, revenue rose 13.2 per cent to $1.440 billion and net profit jumped by 14.2 per cent to $95.1 million. Earnings per share were up 12.4 per cent to $1.088 and full-year franked dividends increased by 14.5 per cent to 95 cents. Russell expects annual earnings per share growth of more than 12 per cent a year for at least the next three years, providing a fully franked dividend yield of 5.5 per cent in the next 12 months before increasing to 7 per cent.

Russell says the company is debt free, with $130 million in cash on its balance sheet at June 30, 2011. “This company is a proven performer irrespective of the global economic climate,” Russell says.  

Charts: Monadelphous Limited

More news: Monadelphous Limited

 

IOOF Holdings (IFL)

 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Share price: $6.20
Latest full year dividend: $0.43
Dividend Yield: 7.0%
Market capitalisation: $1,425 million
Price/earnings ratio:  12.56 times

IOOF Holdings is a vertically integrated wealth manager.  Successful merger and acquisition activity amid integration and rationalisation of its platforms have generated strong growth. IOOF has just completed the acquisition of DKN Financial Group and Russell says management has flagged more efficiency and information technology gains.

As a competitor to AMP and the four major banks, Russell says IOOF may well be a takeover target. 

In another record year to June 30, 2011, normalised net profit was up 15 per cent to $111.5 million, with earnings per share up 14 per cent to 48.4 cents. Operating cash flows were a strong $144.1 million, which Russell says leaves a debt-free IOOF with cash of $152 million.

Funds under management and administration grew 6 per cent to $76 billion. “The 43 cent fully franked dividend provides an historic yield of 7 per cent, which is set to grow,” Russell says.

Charts: IOOF Holdings Limited

More news: IOOF Holdings Limited

 

Westpac (WBC)

 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Share price: $21.04
Latest full year dividend: $1.56
Dividend Yield: 7.40%
Market capitalisation: $65,765 million
Price/earnings ratio:  10.35 times

Australia’s big banks are well capitalised and hold tier one reserves above regulatory requirements. They also pay attractive fully franked dividends from consistently booking multi-billion dollar profits each year. Their share prices were punished over European debt concerns, but recently rallied on brighter news of a potential solution.

Chris Elliott, of Shadforth Financial Group, prefers Westpac for its strong banking franchise in Australia and New Zealand, that offers balanced exposure to retail, corporate and institutional sectors. “Westpac is a strong performer and has retained a relatively consistent dividend payout ratio of between 70 per cent to 73 per cent,” he says. “Our 2012 dividend forecast is $1.57 a share fully franked, which represents a yield of 7.15 per cent or grossed up yield of 10.2 per cent.”

Elliott says Westpac’s earnings growth is slowing in line with credit growth due to challenging economic conditions. “But Westpac represents good income with less exposure than its peers to the fragile Asian and European banking sectors.”

Charts: Westpac Banking Corporation

More news: Westpac Banking Corporation

 

Wesfarmers (WES)

 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Share price: $33.00
Latest full year dividend: $1.50
Dividend Yield: 5.1%
Market capitalisation: $31,193 million
Price/earnings ratio:  17.57 times

Industrial conglomerate Wesfarmers benefits from diverse income streams in uncertain times. Company operating revenue for the 12 months to June 30, 2011 was up 5.9 per cent to $54.9 billion. Coles lifted earnings before interest and tax by 21.2 per cent to $1.166 billion, while EBIT for hardware giant Bunnings improved 10.2 per cent to $802 million. The company increased its final dividend by 21.4 per cent to 85 cents, taking the full-year dividend to $1.50 a share.

Elliott says that in the past few years, Wesfarmers has focused on reducing debt and now carries a modest debt-to-equity ratio of 25 per cent. “With debt levels under control, Wesfarmers is likely to focus on building the dividend payout,” he says.  With Wesfarmers agreeing to sell its Premier Coal business to Austar Coal Mine for $296.8 million, Elliott says it leaves further scope for reducing debt and increasing dividends.

Elliott forecasts that Wesfarmers will lift its full year dividend in 2012 to $2 a share for a fully franked yield of 6.3 per cent, or a grossed up yield of 9 per cent.

Charts: Wesfarmers Limited

More news: Wesfarmers Limited

 

AGL Limited (AGK)

 

Chart: Share price over the year to 11/11/2011 versus ASX200 (XJO)

Share price: $14.89
Latest full year dividend: $0.60
Dividend Yield: 4.2%
Market capitalisation: $6,918 million
Price/earnings ratio:  15.11 times

Energy giant AGL recently announced a 32 per cent increase in total proven and probable gas reserves in the 12 months to June 30, 2011. It also contracted almost 96,000 new electricity customers in New South Wales in the 2011 second half. 

Revenue for the year grew by 7 per cent to $7.072 billion, largely driven by rising transmission and distribution charges. Underlying operating cash flow before tax was up $45.7 million to $676 million.

AGL also carries very little debt, with a debt-to-equity ratio of about 6 per cent, leaving the company in a strong position.

With Australia’s largest retail energy and dual fuel customer base, Mark Lennox, of Think Technically, says AGL is defensive, but he also expects significant growth from its merchant energy and retail division. AGL announced a return to 100 per cent franking for the final 31-cent dividend, taking the full year to 60 cents, up 1.7 per cent. “AGL’s financials will continue to improve,” Lennox says.

Charts: AGL Limited

More news: AGL Limited

 

COMPANYCODELATEST FULL YEAR DIVIDENDDIVIDEND YIELD AT NOVEMBER 14, 2011 (INTRA DAY %)
Telstra(TLS)$0.288.9
Monadelphous Group(MND)$0.955.2
IOOF Holdings(IFL)$0.437.0
Westpac Bank(WBC)$1.567.4
Wesfarmers(WES)$1.505.1
AGL Energy(AGK)$0.604.2

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.

 

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