The cash rate could fall as low as 1% by 2014. Term deposit and savings rates could be slashed to virtually zero. More than ever, it's time to turn to dividend stocks, says The Motley Fool.
"Shares rise for 6th straight day", screamed The Australian Financial Review on October 4th 2012, the longest rally in 10 months. It put the S&P/ASX 200 index at 14-month highs.
Over in the US, the S&P 500 is on the cusp of a five year high. Although most Australians probably wouldn't realise it, the leading US index has jumped 16% so far in 2012.
Who said high unemployment and a slow economic recovery is bad for the share market?
Death of the term deposit
You've seen the headlines: interest rates have been cut to lows not seen since 2009. Worse, they're likely to sink even further. The days of 5% interest rates are well and truly numbered, if not virtually already gone.
According to The Australian Financial Review, the futures market indicates that "the cash rate could drop to a record low of 2.25 to 2.5 per cent over the next 12 months."
Worse, BT Investment Management's Vimal Gor said in the same newspaper he's long Australian government bonds "on a prediction the cash rate will bottom out in 2014 at between 1% and 1.5%…"
Holy term deposit…
Fortunately, there's a better spot for your money. In the face of crashing interest rates, by comparison, solid, dividend-paying shares have arguably never looked more appealing.
With that theme in mind, we asked Motley Fool Investment Analysts Scott Phillips and Mike King to each name one of their favourite dividend-paying stocks you can buy now.
Pick #1: Boasting a 5.8% yield and with shares trading at a discount…
Investment analyst Scott Phillips' pick is one that should be familiar to subscribers of Motley Fool Share Advisor.
This company is a strong operator in a wonderful business — one that is justly famous for being asset light, and for the operating leverage and fat profit margins inherent in the model. In fact, Scott's pick is an absolute cash-flow monster!
Even better, the industry this company is in has fallen momentarily out of favour. That means we've got the chance to buy shares at a discount. So we can collect the dividend — a sound 5.8% yield — with the reasonable expectation of share-price appreciation.
Here's the lowdown…
Platinum Asset Management (ASX: PTM) has managed mutual funds and hedge funds for nearly 20 years, but recently fund flows have been hit hard with the overall pullback in the share market. At the same time, some of Platinum's funds have performed poorly.
For savvy investors, this spells opportunity. Scott is confident that Platinum is set to bounce back.
"Economic and investment cycles have always been with us," he says, "and there's nothing to suggest that 'this time is different.' The same is likely true of Platinum's investment performance, making the company an attractive investment at this point in the cycle."
Sound good? Read on for another promising dividend play…
Pick #2: Telecom company with fat yield
Motley Fool investment analyst Mike King has picked a Melbourne-based telecom company that's trading at a cheap multiple relative to its sector.
As you may know, the telecom business is attractive based on its recurring-revenue model and runway of growth ahead. But you'd only want to own the best operators.
Mike's pick is certainly a strong contender. This company has been expanding margins and growing earnings per share for ten years straight. What's more, this company just raised its dividend by 28% in the last year!
Here's the story…
M2 Telecommunications (ASX: MTU) supplies telecom, land-line and data services to small businesses and to residences. With a forward price-to-earnings ratio of 9.5 — against a sector average of 12.6 — M2 Telecommunications is well positioned for share price appreciation.
And while you're waiting, collect the fat 5% yield — as good as the rates we all once enjoyed on our term deposits.
Dividends to enrich a generation
The two companies highlighted above are worthy of consideration for any dividend-paying portfolio, as are the 8 ASX companies Motley Fool Share Advisor currently rates as a buy.
It might be seemingly easy for the Reserve Bank of Australia to kill term deposits, but it can't touch dividends. A mainstay of investing returns for well over a century, dividends are likely to continue to enrich this generation, and many more generations to come.
If you are looking for ASX investing ideas, look no further than our brand new free report: The Motley Fool's Top Stock for 2012-13. In this free report, Investment Analyst Scott Phillips names his top pick for 2012-13…and beyond. Click here now to find out the name of this small but growing software company with huge potential. But hurry – the report is free for only a limited period of time.
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The Motley Fool's purpose is to help the world invest, better. Take Stock is 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. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
