It's tough being a saver at the moment. Rates are low, and the media don't seem to know — or feel — their pain.
You see, the media loves to report falling interest rates as good news. By reducing the cost of borrowing, they say, the RBA is cutting us all some slack. That's true if you have a mortgage and your're not also trying to save.
Smokin' Joe Hockey — this time around, at least — as well as many economists and business leaders, loves a low cash rate. Lower rates will encourage us all to spend, supposedly, and stimulate the economy.
As the treasurer happily announced just under a month ago, when the RBA last slashed rates:
"This is good news for Australian families and it's good news for Australian business"
Sorry, Joe… it's not good news at all, for me.
Personally, I see lower interest rates as a negative. In fact, I'd prefer if interest rates were much higher! And so should you.
You see, if, like me, you are a net saver, lower rates are nothing short of a pay cut. Many financially prudent Australians, who have worked hard to build up a nest egg for retirement, will also see these rates cuts as bad news.
And it's been awfully tough going for interest-hungry investors of late — in fact, the toughest in living memory. Just ask the RBA:
Today, term deposits are paying half the interest they were a decade ago.
Yes, while the price of petrol, food, and Smokin' Joe's cigars keep going up, those living on term deposits have had to tighten their belts — by around 50%, before inflation.
And, sadly, it's likely to get worse. At least that's what the pundits are saying — according to Morningstar, 18 of 29 economists surveyed expect the RBA to cut the official cash rate to a measly 2% tomorrow. The remainder expect rates to be cut by May.
Bank of America Merrill Lynch Australian economist Saul Eslake said, "We expect that the RBA will cut again at its March meeting next week."
And let's face it, the RBA isn't cutting interest rates because the economy is doing well. We're seeing lower rates because the economy is struggling — and that's not good news for anyone!
Given the choice, i'd prefer more 'normal' levels of interest rates and a strong economy.
Sure, if you have a mountain of debt, you'll be loving these lower rates, and cheering every further cut that comes. But be careful — very careful — when rates rise. What the RBA giveth, the RBA can taketh away… and that's gonna hurt.
Smart, savvy, Take Stock readers, on the contrary, are using this as an opportunity to accelerate debt repayments, rather than increasing their spending (as the treasurer seems to be hoping).
But if you're in, or approaching, retirement, these historic interest rate lows are actively eroding your standard of living… if you're relying on cash in the bank.
Of course, interest rates will eventually go back up, but that's likely a long way off. With the mining boom fading, record household debt and our largest trading partners doing it tough, we should settle in for a rather protracted period of lower rates.
Ouch.
A Better Way
The good news is that there is an alternative. One that allows for very reliable, attractive, increasing and tax-effective income. I'm talking, of course, about investing in quality dividend paying shares.
How can you find them? I'm glad you asked! Motley Fool Dividend Investor — the income-focussed investment service I run — currently has an average yield of 4.3%, or 6.2% when you factor in those wonderful franking credits (thanks ATO!).
And the companies we are recommending are far from speculative flash-in-the-pan hopefuls. We look for highly profitable and defensive businesses that have been around for decades, and will be around for many more.
What About The Risks?
But shares are risky, right?
Yes, share prices can be volatile — even the best companies will see their share prices rise and fall in the short term, but if you're a long term, income focused capital-F Foolish investor, that's just noise. Even during so-called 'bear markets'.
Don't believe me? Check out just how well the companies on our scorecard managed to not only sustain, but grow, despite the devastation of the Global Financial Crisis (GFC).
Based on the wonderful dividends these companies paid, you wouldn't know the Australian sharemarket suffered one of the worst slumps in history over this period.
Though, of course, the same can't be said for all shares throughout this period…not all shares are equal!
Safety First
Let me say that again — not all shares are equal. We don't want to put our members' hard earned savings at risk in a vain attempt to chase yield. Here at Motley Fool Dividend Investor, it's always a question of safety first.
We can't know when the share market will next take a dive, and by how much it will fall. But we can avoid the kinds of companies that aren't likely to weather the storm.
Companies like ABC Learning, that had unreasonably high and unsustainable debt, and that ultimately failed when things got tough, are never going to interest us.
Companies like Forge Group, that only do well when the economy is charging along, are likewise not going to tempt us.
We want businesses that are built to last. That are run by honest, capable and shareholder focused people. Businesses that can sustain dividends in good times and bad, and businesses that, despite the occasional economic jolt, will continue to grow earnings well into the future.
Foolish Yield
While our Treasurer and the newspaper headlines are cheering lower interest rates, prudent long term savers are being severely punished by the current, and likely ongoing, low-interest-rate environment.
As investors look farther afield for decent income returns, the sharemarket offers an attractive alternative — though one that is not without some risk.
Yes, yield matters — a lot — but sensible investors need to also ensure that yield is supported by quality, resilient and shareholder friendly businesses.
The kinds of businesses we focus on here at Motley Fool Dividend Investor.
If this sounds like the tax effective, income producing, thoughtful investing strategy for you, i'd love to have you join me at Motley Fool Dividend Investor (and there's no risk — our 30-day money back guarantee sees to that).
