As interest rates crunch to records lows, the demand for “defensive income stocks” has taken some of the better known stocks to crazy prices. I thought the ASX (yes, that’s the listed company that runs the stock exchange) was a sell at $58 – it is now trading around $87, on a prospective yield of just 2.7% and 26.5% overvalued according to broker forecasts. Transurban, Sydney Airport, Coles, APA, Medibank and many of the property trusts are in the same situation.
So let’s look outside the top 50 stocks for some ideas. My idea of an “income stock” is that there needs to be a high degree of confidence that earnings (and the dividend) is sustainable; with a good track record; and importantly, relatively low capital risk. That is, if the market falls and/or the stock underwhelms, it will react less violently than the market. Obviously, a high dividend yield and franking are important but you can’t always have everything, particularly if you are putting any emphasis on capital stability.
Here are five stocks outside the top 50 to consider. I have thrown in a beaten up cyclical, a consumer discretionary and an energy stock, which certainly have some risk, so I have listed them in ascending order according to my assessment of “least risky” to “most risky”.