Australia stocks no longer expensive: Goldman

Leslie Shaffer | Writer for
Brendon Thorne | Bloomberg | Getty Images

The global market selloff has a silver lining for Australian stocks, as the highest yielding developed market globally is no longer too expensive, Goldman Sachs said.

"Following the underperformance of Australia relative to global markets and its continued growth in dividends, Australia has now moved back to a position where it no longer looks overvalued on the basis of yield," Goldman said in a note.

(Read more: 2014 a 'litmus test' for Australia economy: Goldman)

After global bond yields hit their nadir in mid-2013, yield-chasing reached extreme levels, pushing Australia's high-dividend payers up to the point where the market looked as much as 20 percent over-valued, the bank said.

In May, when the 10-year U.S. Treasury yield was near its 1.7 percent low, the average Australian index stock with a 5-6 percent yield traded at 15.4 times earnings, around 15 percent above the international average, while stocks with dividend yields of more than 6 percent were at a 30 percent premium to global averages, the bank noted.

What does Australia's 2014 outlook look like?

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"In the period since, Australia's under-performance as bond yields rose combined with further dividend increases have seen this yield premium disappear," it said.

With the market's recent fall – the S&P/ASX 200 index is down around 4 percent since the start of the year – and expectations that low interest rates will stick around for a while, Goldman believes the 4.8 percent yield for the index will keep shares supported.

Even better for yield chasers, Goldman believes the dividends can be sustained even though it expects this year's earnings forecasts may slip and even if economic conditions don't improve.

(Read more: Australia keeps rates steady at a record low)

The bank does expect a weaker Australian dollar and loose monetary policy will drive an earnings recovery into the end of the year.

To be sure, it expects most companies won't be able to surprise with dividend increases this year, as the pay-out ratio for index stocks already averages around 70 percent of earnings, a 20-year high. It also noted dividends per share have increased by 8 percent over the past two years even as earnings per share have fallen six percent.

How will Australian markets fare this year?

(Read more: Has the tide turned for corporate Australia?)

"Given historically high pay-out ratios, we expect dividends to grow at or below the growth rate in earnings, but believe they have very limited downside in the current environment," it said.

The big exception may be the beaten down mining sector, it said, noting that its payout levels are low, with consensus forecasts calling for the companies to pay out only around 37 percent of earnings this year.

"The mining sector remains the most likely to deliver capital management surprises," Goldman said. "While earnings volatility is high as the commodity super cycle ends, mining firms remain focused on cutting costs and reviewing their capex budgets."

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter