Households with the bulk of their money tied up in savings accounts or term deposits could be squeezed even harder in 2015 with their total returns tipped to weaken.
By now, you've probably heard the speculation surrounding the Reserve Bank and how it could be forced to cut interest rates even further in the New Year. While they currently sit at 2.5%, the central bank could cut interest rates once, twice, or even three times before the end of 2015.
3 dividend stocks to drive your 2015 returns
While that's great for people paying off their debts, it's terrible for retirees or households who have most of their money in savings accounts or in bonds. Once tax and inflationary effects are taken into account, those investors will likely be losing money.
To make matters even worse, it's likely that the banks will be hit with new liquidity rules that require them to hold more capital in reserve. While the dividends offered by the Big Four could take a hit in the medium-term, so too could the amount they pay to depositors. As The Australian Financial Review reported on the weekend:
"Savers seeking to renew fixed five-year term accounts, who are typically risk-averse retirees, are facing a 40 per cent cut on total returns for comparable fixed-term products they are coming out of… Those considering more popular one and three-year rates are likely to take a 20 per cent clip, while short-term returns will be below inflation, so capital is effectively being eroded."
While equities have typically been seen as the riskier investment class, in some ways it could now be argued that there is more risk involved in having your money in a savings account. At least by investing in equities, there's a chance of making some decent gains!
With that in mind, it's likely that high-yield dividend stocks will again be the target of investors as they seek superior returns. What's more, they're likely to target those stocks which also offer franking credits as a way to partially offset their tax obligations.
Amongst the stocks that investors might look at are Woolworths Limited (ASX: WOW), Insurance Australia Group Ltd (ASX: IAG) and Coca-Cola Amatil Ltd (ASX: CCL). Woolworths and Coca-Cola Amatil both find themselves out of the market's favour, making now the opportune time to buy. In FY15, they're expected to yield 4.7% (fully franked) and 4.4% (franked to 75%) respectively.
Insurance Australia Group is also in a decent position to benefit. Although its shares are trading near the upper end of its $5.32 – $6.61 range for 2014, it's still expected to yield 6.1% in FY15, fully franked. Grossed up, that's a yield of 8.7%!
There's one more stock which could be an even better bet in 2015.
