Investors and economists were at panic stations during the week when the latest Australian inflation numbers came out (ok, maybe not that panicked but they were concerned). Headline inflation (which includes everything) was 0.5% for the quarter, or 3% on an annualised rate. This is at the top of the RBA's 2% or 3% 'comfortable' range for keeping interest rates stable.
Going Backwards
With inflation running at an annual pace of 3%, Australians need to be making at least 3% after tax on their money in order to ensure they aren't going backwards! A quick glance at term deposits from one of the big four banks shows that a rate above 4% is difficult to achieve, and after paying 30% tax the investor only receives 2.8% interest.
What To Do?
So, investors with money in a term deposit paying 4% are actually receiving an after-tax benefit of around 2.8%. The cost of living is currently increasing by around 3%, meaning that investors are actually losing 0.2% of their money every year by having it in that term deposit.
NOTE: This is a simplistic way of looking at it, but demonstrates the problems investors have with the current low interest rate environment.
Investors looking purely for income could consider putting money into the sharemarket, where big yields are on offer but the risk of losing capital is higher.
Which Stocks?
Obviously every investor or adviser will give you a different answer to this question. If looking for sharemarket options that are more like term deposits than speculative gambles, I would suggest buying companies that own revenue producing assets that are relatively resilient to swings in the global economy.
Three great options are Sydney Airport Holdings Ltd (ASX: SYD), Transurban Group (ASX: TCL) and Telstra Corporation Ltd (ASX: TLS).
Sydney Airport unsurprisingly owns and operates the Sydney Airport. The company offers a forward yield of 5.8% and the airport is easily the busiest in Australia.
Transurban operates nine major toll-roads in Australia and the US. The roads are in major cities and are experiencing improved utilisation and are generating strong cashflow for the company, allowing for a 5% partially franked dividend.
Finally, Telstra is one of Australia's best companies. It is exposed to the growing use of smartphones and the internet and is expanding its offering into media and related industries. Telstra's 5.3% fully franked dividend is loved by investors and largely secured by NBN payments from the government for its network of telecommunication pits.
