As the Reserve Bank of Australia contemplates raising interest rates (as a result of high inflation and a recovering Aussie economy) high-yielding blue-chip stocks may begin to show weakness. This will happen because, comparatively, dividends from stocks will be less appealing against 'sure things' such as term deposits and bonds.
I'm not saying rush out and sell your blue-chip stocks. Significantly higher interest rates aren't likely for a while (perhaps in 2015). However, successful investing is all about anticipating what will be in demand in one, three, or 10 years, and positioning yourself accordingly.
Of course the news of rising interest rates is nothing new. It's inevitable interest rates will have to rise because much of the slow-down in mining (which was one of the major catalysts for lowering rates) has already sailed through the economy and local equity market. Property prices are climbing, retail is showing improvement and confidence is growing.
Rates will rise in the future.
One way to continue taking advantage of capital gains in the stock market (regardless of interest rates) is by buying good businesses looking to grow their earnings sustainably. Share prices will follow. Here are three growth stories with little or no debt which will continue to remain in demand no matter how attractive interest rates are.
The first of which is Senex Energy Ltd (ASX: SXY). It has no debt and is growing reserves and production. It operates in the extremely promising Cooper Basin. With key join ventures and sensible management at the helm, this stock if definitely worthy of attention from investors focused on long-term growth.
Also in the resources sector, although a completely different type of commodity, is Tassal Group Limited (ASX: TGR). It produces salmon which are harvested in environmentally and economically friendly farms in Tasmania. Its recent change in focus from overseas markets to growing domestic per capita consumption was risky but rewarding. It has set up the business for long-term success.
Nearmap Ltd (ASX: NEA) is a small-cap technology company which does geospatial mapping, like Google maps, only better. Its maps are updated to allow businesses to rely on the images for up-to-date decisions on, for example, mining construction projects. In its most recent half-year results presentation it notched-up a maiden profit and showed strong cashflows.
Donaco International Ltd (ASX: DNA) is a casino operator which has rapidly expanded its floor space and hotel size to meet the increased demand from the rising middle class in China. Its growth has almost nothing to do with the state of the Australian economy or interest rates. Keep this one on your watchlist.
High income will still be available from growth stocks when interest rates rise. RCG Corporation Limited (ASX: RCG) is an example of both a high yield and growth company. It's the name behind brands such as Saucony, The Athletes Foot and more. It pays a 5.7% dividend.
Foolish takeaway
Positioning your portfolio for rising interest rates is important. I've already transitioned my holdings away from high-yielding blue-chip stocks into companies more leveraged to growth. Small and mid-cap stocks have underperformed in recent years and I expect them to show strong signs of growth in the remainder of 2014.
