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Should you buy this unloved ASX dividend stock for the 7% yield?

Sebastian Bowen
question

In this era of record low interest rates, it’s becoming increasingly harder to find top-notch ASX dividend stocks that haven’t been bid to the sky by yield-hungry investors.

Stocks like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) have experienced massive share price growth in 2019 and both SYD and TCL shares trade on earnings multiples of over 50 today.

Sure, the banks like Commonwealth Bank of Australia (ASX: CBA) are always there, but I don’t think anyone but the most optimistic investor out there is expecting a dividend pay rise from CBA anytime soon. In my view, a Sword of Damocles in the form of capital raises and dividend/franking cuts is hanging over all of the banks as we head into 2020.

But there is one stock that I think has been thoroughly overlooked for its potential to provide robust dividend income until now. That stock is AGL Energy Ltd (ASX: AGL).

What does AGL do?

AGL is the largest private supplier of gas and electricity in Australia and one of Australia’s oldest companies (founded in 1837 as the Australian Gas Light Company). The company has a large portfolio of generation and transmission assets, which include gas- and coal-fired power stations, wind farms, hydroelectric power stations and solar power plants.

What about AGL’s dividends?

Being a utility provider, you would expect AGL to have a decent dividend yield – and AGL does not disappoint in this area with a 75% target payout ratio. This year, AGL has paid a total of $1.19 per share in dividends, which translates to a trailing dividend yield of 5.7%, franked to 80%. If you include these franking credits, the yield jumps to a juicy 6.99%.

AGL has also been growing this dividend at a healthy pace since 2007 – with the payout rising in all but one year since.

I especially like AGL as an income stock as I regard the company’s earnings and dividend as fairly defensive. Power and gas are needs and not wants in our modern world – meaning that AGL’s earnings should hold up fairly well if we were to enter an economic downturn or recession.

Foolish takeaway

I think as far as robust dividend stocks are concerned, AGL is a top choice for income investors today. Although there are regulatory and political risks with owning a company that profits from high energy prices, I think that the current stock price more than accounts for this.

The post Should you buy this unloved ASX dividend stock for the 7% yield? appeared first on Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited and Transurban Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019