The Reserve Bank of Australia's cash rate at just 2.25% is pushing term deposit yields lower… and lower.
As it stands the big banks are offering deposit holders interest rates of around 2.6% per year, with interest paid at maturity.
Given interest on deposits and other fixed income products is subject to income tax and susceptible to rising inflation (currently 1.7%), investors in a high tax bracket could well be losing money, from a purchasing power perspective.
That's why so many Australians are turning to shares and property in what is being known as the 'search for yield'.
With property prices pushing higher and tax-effective franking credits on offer, it's likely the share market will be the number one destination for those seeking to escape low interest rates.
3 blue chip stocks with big dividends
- Australia and New Zealand Banking Group (ASX: ANZ) is forecast to pay a 5.1% fully franked dividend in the next year. Grossed-up for franking credits, that equates to a comparable yield of 7.3%.
- Telstra Corporation Ltd (ASX: TLS) is a renowned dividend-paying stock and is being tipped by analysts to a pay a 30 cents per share fully franked dividend in 2015, equating to a grossed-up dividend yield of 6.8%.
- Woolworths Limited (ASX: WOW), the supermarket giant, has seen its share price sold off in the past year – falling 17%. However this has boosted its dividend yield to a handy 4.7% fully franked, or 6.71% grossed-up.
Should you buy these shares?
Investors mustn't be fooled into thinking dividends yields are a sure thing. Unlike term deposits, which have government guarantees, share prices will rise and fall and company directors are not obliged to pay dividends if they feel the cash could be better spent on other initiatives.
As a result, it's important investors focus on the underlying business (and its valuation!) before hitting the buy button. At today's prices, I believe Woolworths is the only stock of the three above which deserves your consideration – both Telstra and ANZ shares are too expensive to justify an investment.
