Selling pressure continued this week despite the extension on bans on short selling in France, Italy, Spain and Belgium. The bans were put in place in an attempt to put an end to the rout on European bank shares, which had plummeted 24% in just three weeks. With the ban extended to shorting indices such as France's CAC40 traders moved on to the DAX, causing a flash crash in Germany on Thursday and further falls on Friday, although the DAX did manage to eke out a 1.0% gain for the week. While the CAC40 has fallen just 0.3% since the ban was put in place, DAX futures have lost almost 6% and brokers believe that there's plenty more sellling to come. It seems that whatever measures are put in place to prop sharemarkets up, the bears are firmly in control - for the moment, at least.

With global markets displaying a downward bias, buyers with a short-term focus are simply sitting on the sidelines. Meanwhile long-term investors are coming to terms with the prospect of meagre gains, forcing them to look toward dividends as the key to their investment returns. And with the overall Australian sharemarket providing a dividend yield of 5%, investment manager Fidelity believes that now is the time for long-term investors to jump into dividend paying stocks.

“The Australian market as a whole provides a significant dividend investment play - a dividend yield of about 5%,” says Paul Taylor, Head of Australian Equities at Fidelity and Portfolio Manager of the Fidelity Australian Equities Fund. Taylor believes that this is a really sustainable yield and this makes the Australian market particularly attractive. "Even if we stay at this low valuation level we’re still going to get pretty good returns from the earnings growth as well as that dividend yield," he says.

As a case in point, shares in the four major banks provide an average dividend yield of 7% plus franking credits - superior to the banks' term deposit rates. That said, it must be noted that with shares there are the twin risks of capital loss and lower future yields. With the pressure on bank stocks worldwide and the threat of GFC Mark II in the air, it would be a brave soul to make a play on bank stocks based purely on dividend yield while ignoring the risks. Not only is credit tightening around the globe, but Aussie banks are particularly at risk to any downturn in the property market. 

Source: Fidelity, Mozo and Bloomberg as at 18 August 2011

Fidelity points out that as interest rates are lowered around the world to stimulate slowing economies, bank deposit rates and government bond returns are expected to drop further, making a host of dividend paying equities - such as Telstra, Map, Goodman and Westfield - more attractive. (In fact, 10-year Treasuries yields in the United States dipped below 2% for the first time since 1954.)

Ideally investors want to pick undervalued stocks that would provide both a high dividend yield and share price growth, although this is easier said than done. Telstra, QBE, IOOF Holdings and Westfield are all popular stocks with brokers we surveyed, what's more they offer yields of more than 7%. On the flipside there are several stocks that brokers advise to avoid, despite the high yield on offer. These include Macquarie, Tabcorp, David Jones, Goodman Fielder and Mirvac. The table below outlines the yield and recent broker calls for each of the stocks.

The Australian market is currently sitting on a valuation level of around 10 times earnings and about a 5% dividend yield, which Fidelity believes is very attractive from both an absolute valuation level and also against Australia's own historic levels. "Traditionally the Australian market trades at closer to 14 – 15x," says Taylor. "While I don't think the Australian market is going to go from 10 back up to 14-15x anytime soon, I think maybe we stay at that 10-11x and returns come from the dividends that get paid, as well as the earnings growth in the market."

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.