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This article appeared in the January 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.

More investors focussed on dividend yield as the troubles in Europe intensified in 2011 and global sharemarkets remained volatile. They sought income-producing alternatives, such as blue-chip stocks with reliable, high yield. MATTHEW KOROI of Clime Investment Management reports.

Photo of Matthew Koroi By Matthew Koroi, Clime

Many investors are shifting their focus to achieving yield rather than capital growth, and favouring bank deposits over the sharemarket. But they must remember that the return from a bank is subject to decisions by the Reserve Bank: lower official interest rates mean lower earnings for savers.

Much of the global economic growth of the past decade was fuelled by debt and the continuation of growth was reliant on buoyant levels of confidence. Investor confidence was shattered by the Global Financial Crisis and the increasingly conservative behaviour that followed has resulted in a growing desire by many people to save and pay off debt.

We are now in a period of stagnant global economic growth. Nevertheless, share investors with a rational view of valuing businesses will have the opportunity to be rewarded over time. This article looks at what 2012 may bring and where to look for quality companies that at current prices offer attractive yields.

Reliable yield is vital

Dividend yield has been a significant focus for Clime as the sharemarket tumbled and the troubles in Europe intensified, and we are hardly surprised to see many investors putting dividend yield at the forefront of their investment decision-making.

In the past few months, we have seen an increase in the share price of many Australian companies traditionally known for their yield, despite substantial declines across the general market. One example is Telstra. With the yield on 10-year Australian Government bonds now below 4 per cent (lower than at the peak of the GFC), investors are searching for income-producing alternatives, such as blue-chip stocks with reliable, high dividend yield.

Australian corporations have also recognised the increasingly conservative nature of investors and many have been quick to take advantage, raising capital through issuing interest-bearing securities, such as corporate bonds and hybrids. More should be expected in 2012.

Some companies to watch

In our view, the following companies are worth following in 2012 if they can be bought below their intrinsic value (the company's true value).

(Editor's note: do not read the following ideas as stock recommendations. Do further research of your own or talk to your financial adviser before acting on themes in this article.)

1. Telstra Corporation (ASX code: TLS)

  • Share price: $3.27
  • Yield: 8.5% (fully franked).

Because of its poor share price performance over the past decade, Telstra is not the most popular stock on the sharemarket. Analysing its performance from a business perspective, however, reveals a different picture. With a consistently high return on equity (ROE), strong market position, historically consistent dividends, and backed by strong operating cash flows, we are happy with Telstra from a yield perspective. Also, management has confirmed a 28-cent dividend, at least for the next year. Telstra is a stock to watch if the price falls and better value emerges.

2. Spark Infrastructure Group (ASX: SKI)

  • Share price: $1.30
  • Yield: 7.1% (unfranked).

Spark is an infrastructure fund that invests in regulated utility infrastructure within Australia. Its investment mandate includes electricity and gas distribution, gas transmission, regulated water and sewerage assets, all of which offer relatively low-risk, stable cash flows and the potential for long-term growth more or less in line with inflation.

Spark presents itself primarily as an income play with some longer-term capital growth potential. Given the regulated and capital-intensive nature of its asset base, investors should expect low rates of capital growth and return on equity. However, the company does offer reliable returns because of its position in a regulated and monopolistic sector.

3. Ethane Pipeline Income Fund (ASX: EPX)

  • Share price: $1.64
  • Yield: 12% (unfranked) in 2012.

The Ethane Pipeline Income Fund owns a 1375-kilometre high-pressure gas pipeline, which was purpose built to carry ethane gas from a gas-processing facility at Moomba, in South Australia's Cooper Basin, to a petrochemical plant at Botany Bay in Sydney. The pipeline was commissioned in 1996 and its technical life was estimated in the 2006 prospectus to be more than 60 years.

Its return on equity is forecast to rise, as are its dividends, with the fund free of debt by the end of 2012.

4. Woolworths (ASX: WOW)

  • Share price: $26.17
  • Yield: 4.6% (fully franked).

Woolworths has a history of high returns on equity, strong cash flows and sound capital management. Population growth and the company's core non-discretionary product offering (such as food) should mean it will continue to perform, even through tough times. Recent speculation that the business is "ex-growth" has led to its share price falling somewhat over the past few months. Our assessment is that the business is trading at a discount to its intrinsic value at current prices.

5. Australia & New Zealand Banking Group (ASX: ANZ)

  • Share price: $20.74
  • Yield: 6.4% (fully franked).

Over the past two decades the average dividend yield of the big four banks has been 5.8 per cent. At an average of 7.0 per cent, the yield available on the big four banks is high in an historical context. Including the benefit of franking, this figure is around 10 per cent.

We like ANZ because of its Asian growth strategy; Asia offers the best economic growth profile globally, although it is not without risk. 2011 financial year metrics include:

  • Net interest margin: 2.51%
  • Return on assets: 0.95%
  • Return on equity: 14.74%.

6. Commonwealth Bank of Australia (ASX: CBA)

  • Share price: $49.35
  • Yield: 6.1% (fully franked)

CBA has strong metrics, a clear strategy and is the best-performing locally focused bank. 2011 financial year metrics include:

  • Net interest margin: 2.11%
  • Return on assets: 1.02%
  • Return on equity: 18.6%.

7. Growthpoint Properties Australia (ASX: GOZ)

  • Share price: $1.94
  • Yield: 9.3% (unfranked).

Growthpoint Properties is an Australian-based property investment company with investments in commercial (one-third) and industrial (two-thirds) property. At June 30, 2011 it had a portfolio of 37 properties across all states, with a value of approximately $1.24 billion.

Its properties are leased by quality tenants, including Woolworths (37 per cent of income), GE Capital (9 per cent) and Coles Group (6 per cent). This gives confidence in the stability of future revenue. In addition, the group currently enjoys 100 per cent occupancy across its portfolio and a weighted average lease expiry of approximately nine years.

8. Mortgage Choice (ASX: MOC)

  • Share price: $1.30
  • Yield: 9.6% (fully franked).

Because it pays out essentially 100 per cent of its cash earnings as dividends each year, we do not see value growing substantially for Mortgage Choice. But with management expecting earnings to remain flat in the near future, and with a current yield of 9.6 per cent, we believe Mortgage Choice is an attractive yield investment.

The company's main area of expertise is mortgage broking and it runs its business through a franchise model. It has been alluded to in recent commentary by management that the business is interested in branching into wealth management; however the exact structure and product offering are yet to be announced.

9. Platinum Asset Management (ASX: PTM)

  • Share price: $3.60
  • Yield: 6.7% (fully franked).

Sharemarkets move in cycles. From overly pessimistic to overly optimistic, prices fluctuate daily and trends develop over time. In the long term, economic growth ensures that valuations tend to rise and eventually equity markets will reflect this. Fund managers are essentially leveraged to equity market cycles and investors can benefit by accumulating high-performing fund managers at cyclical lows. Kerr Neilson has run Platinum Asset Management for many years and has achieved excellent returns over the period. It is yielding 6.7 per cent at current prices and trading at a discount to value on Clime's forecasts. We believe Platinum is one of the better-quality fund managers to watch.

About the author

Matthew Koroi is an analyst at Clime Investment Management. Clime's online valuation and research service, MyClime, assists investors in identifying companies with attractive dividends and yield. Register for a free 14-day trial. Yields in this story are based on closing share prices on December 13, 2011.

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