Dividend dazzlers

For the year ahead, Woodside Petroleum is expected to be the leader of the fully franked dividend yield club, giving investors just under 9 per cent of income alone. Westpac is the best placed bank at 8.8 per cent.

Hunting for a fully franked yield of over 5 per cent now means investors have plenty of investment options outside of the all-time favourite big four banks and Telstra. However, earnings variability and patchy dividend history means there are few sure bets.

Yields offered on some companies now look too scintillating to ignore. However, investors' focus should be on the quality of the earnings supporting the dividends and dividend history before dividend euphoria takes hold. Investors should do to their homework to make sure the event of the dividend tap being turned down unexpectedly is minimal.

To diversify away from favourite dividend yielding stocks, Suncorp, AMP Limited and ASX Limited are the next best, all offering a yield over 7 per cent. But this doesn’t mean they are rich pickings.

Of those mentioned, Suncorp looks like it has the least risk when it comes to following through on dividend payments for the year ahead. At June 30, Suncorp had $847 million of total capital in excess of their operating target, even after considering payment of the final dividend. Investors might even be in line for another special dividend if Suncorp doesn’t have plans for their extra cash.

The yield on AMP is based on the assumption dividends will return to more historical levels after the reduction in dividends this year. This would see a dividend payment of around 27 cents, equalling an 8.4 per cent yield on a $4.55 share price. However if dividends remain at the current dollar value, the yield drops to 7.5 per cent.

ASX Limited has a patchy dividend paying history, slashing dividends in an erratic fashion. Relying on consistent dividends from ASX would be risky business without a dividend commitment from management. If you could stomach the reality of a lower dividend, they may be just the investment for you.

Even assuming a certain dividend payment, capital values will fluctuate, which can have a more intense investor response, overriding dividends flowing into the bank account.

The problem with dividends is they can be interrupted by a once-off earnings event or something more permanent. The more permanent events are the ones to watch out for, as they often send share prices down with the dividend.

While self-funded retirees living off their self managed super continue to cry for yield, it is of no use hunting for the best yielding companies unless they deliver the dollars.