With interest rates expected to stay at these low levels for the foreseeable future, it’s likely dividend shares will remain in high demand.
Dividend shares provide investors with what is generally a reliable level of income, while also offering the potential for substantial capital gains.
Another significant benefit of owning dividend shares is the tax advantages of fully franked dividends, offering investors a reduction of the tax they pay, or the potential for a tax refund. Fully franked dividends are particularly popular with SMSFs, especially those in retirement phase.
Of course, as with any share market investment, there are risks. A portfolio of one company is extremely risky, as any one individual company can run into problems.
A case in point is one of the country’s most popular companies in the All Ordinaries index, Woolworths (ASX:WOW).
The Woolworths share price hit $38 in 2014, but today Woolworths shares are trading at close to $28. To make matters worse, the Woolworths dividend was almost halved in 2016, and despite the haircut to its share price, trading at over 20 times earnings, Woolworths shares don’t look cheap.
Another case in point is popular ASX 200 stock, Telstra Corporation (ASX:TLS). The Telstra share price has fallen from around $6.50 in 2015 all the way down to around $3.10 in 2018. The Telstra dividend was also cut in 2018.
This ASX 200 company just lifted its dividend by 20 per cent
Mineral Resources Limited (ASX:MIN) is a mining services company, providing crushing services to resource companies. In addition, the company owns and operates resources projects in iron ore and lithium.
Mineral Resources recently reported full year revenues increased 16 per cent to $1.71 billion, with normalised EBITDA up 9 per cent to $507 million.
Operationally, this ASX 200 company reported increased sales of lithium and strong crushing and processing revenue growth.
At year end, Mineral Resources had a strong balance sheet with $240 in cash and substantial available debt facilities. With the Mineral Resources share price at $14.25, the company has a market capitalisation of $2.72 billion.
4.56 per cent fully franked dividend yield
Mineral Resources declared a fully franked full year dividend of 65 cents per share, an increase of 20 per cent on the prior year. Mineral Resources shares trade on a fully franked dividend yield of 4.56 per cent, or 6.5 per cent when grossed up for franking credits.
The company has a strong strong record of growth. Current management have been in place since Mineral Resources listed in 2006 at 90 cents per share. Since that time the team has grown shareholder value at over 30 per cent per annum.
Mineral Resources shares trade on a price to earnings (P/E) ratio of around 10, a valuation that looks absurdly cheap given its growth profile.
In a recent quarterly update, the top performing Flinders Emerging Companies Fund placed a share price target of $21.90 on Mineral Resources shares, implying a substantial 50 per cent upside potential.
The company is not without its risks, being a mining share, and therefore being subject to the vagaries of moving commodity prices. As ever, consider it only as part of a diversified portfolio.