Buy what people are selling and sell what people are buying
A simple investment strategy if there ever was one. The key to it is being ahead of the pack. You need a vision of what people will be buying up.
Why?
Because the RBA may finally have the justification to drop its cash target rates to as little as 2%. The one thing that has been holding it back is to avoid inflaming an already rising housing market with record low loan rates.
The twin collapse of both iron ore and oil prices has set the economy on a downward move. The Aussie dollar is now around 83 US cents, but that doesn't give enough relief. Now, plans to curb home loans with prudential lending rules could be what the central bank is looking for.
Economists see two RBA rate cuts
Some big four bank economists are now forecasting two 25 basis point rate cuts within next year.
One side effect of this is more fixed income and retirement investors will flee bank term deposits and bonds into shares and property. They're a money-savvy lot, so they'll home in on high yields and safe, stable income. The answer? Blue-chips.
Aussie government bonds dipping down further
Even before the anticipated rate cuts, two-year government bond yields have slipped to as low as 2.28%, so even the bond market is foreshadowing a drop below the current 2.5% cash target rate.
Flight to blue-chips for income and security
To protect your own dividend income and make good mid to long-term gains, buying blue-chips now could be a wise step. Later on, if you want, you can sell them at potentially better prices to yield-hungry investors who come late to the game.
I would look at the following blue-chip stocks:
— Suncorp Group Ltd (ASX: SUN), the insurer and banker, is now sporting a hefty 6.1% fully franked yield. The company is expected to rack up cost savings benefits from a business simplification program and it intends to return surplus capital to investors. That could mean more special dividends like the three recent ones in as many years. Dividend growth is just as important as yield and Suncorp has a good record for that as well. Start building a position in this stock.
— Telstra Corporation Ltd (ASX: TLS) is going through an overseas expansion phase which could lead to big revenue growth in the mid term. Still, near-term it will cost a lot for the investment and may take some time to see the full return on it. Earnings and dividends may not grow suddenly from it, yet the payback could be substantial later on. Its bankable reputation as a solid dividend payer still holds true. It has the funds for this growth and will be getting much more from the NBN rollout over the coming decade. This is a longer-term play, but in the meantime you can earn a big 5.3% yield fully franked.
