The Reserve Bank of Australia is set to continue reducing interest rates in the coming months, despite the risk of pushing property prices even higher.
The RBA cut the official cash rate by 25 basis points in February in what was its first interest rate move in 18 months. While most analysts expected it to continue cutting in March, it instead elected to leave them unchanged "for the time being", citing the risks that may arise from the housing market as one of the reasons behind its decision.
A greater need
However, it now seems that there is a much greater need for further easing of monetary policy. Although reducing interest rates further does risk the creation of a so-called "housing bubble", Australia's economic expansion fell to just 2.5% at the end of 2014 while consumer and business confidence levels have also sunk considerably. The unemployment rate is also hovering near a 12-year high at 6.3% with many analysts expecting it to approach the 7% mark this year.
To make matters worse, the RBA had been relying on the US Federal Reserve to reiterate its plans to hike interest rates in order to strengthen the US dollar. Unfortunately, the Fed indicated that any interest rate hikes would be slower than the market had been expecting which has boosted the Australian dollar higher than the RBA's target level of US 75 cents.
In order to rebalance the economy, it is becoming increasingly clear that the RBA may need to prioritise the broader economy over house prices. As quoted by the Fairfax press, Phillip Moffitt, head of Asia-Pacific fixed-income at Goldman Sachs, said "It seems to me that the RBA has just accepted that a strong housing price move is an acceptable consequence, it's the lesser of two evils basically."
Here's how you can profit
With interest rates almost certain to fall at least once more in 2015, the returns from bonds and term deposits have never looked so unappealing. In fact, once inflation and tax charges are taken into account, many of these 'risk-free' assets are actually losing money for investors. With that in mind, investors will increasingly turn towards Australia's high-yield dividend stocks to generate superior returns.
Unfortunately for investors, it's not as simple as dumping your money in the typical go-to dividend stocks – namely the big four banks or Telstra Corporation Ltd (ASX: TLS). Hundreds of thousands of investors have already utilised that tactic to the point where each of those stocks has become overpriced – I struggle to see how any of them could deliver long-term market-beating returns from their current positions.
However, there are a number of other stocks which you could certainly go after instead, including QBE Insurance Group Ltd (ASX: QBE), Woolworths Limited (ASX: WOW) and even the less-well-known G8 Education Ltd (ASX: GEM). While these stocks offer fully franked yields of 3.4%, 4.7% and 5.2% respectively, they are also well-positioned to generate substantial capital gains over the coming years.
