Will the RBA cut interest rates to 2 per cent at 2.30pm today?
In morning trade, the share market has already voted. According to the traders, a rate cut is a done deal.
- The ASX is trading up close to 6,000, with dividend paying stocks leading the way.
- The Aussie dollar is already trading below US76 cents.
Long time readers will know I'm not surprised.
For me, the only surprise is that it has taken investors so long to cotton on to my simple formula for these markets…
Let me be the first to say today's RBA cut is not a done deal, and I'm not making a prediction one way or the other.
Here's what I am saying, no matter what the RBA decide today…
- Rarely before have interest rates been as low as 2%.
- Rarely before has the 10-year Australian Government Bond Yield been as low as 2.3%.
- Rarely before has the differential between the bond yield and gross dividend yields been so large, and so stark.
Take Telstra Corporation Ltd (ASX: TLS) — at $6.40, its shares trade on a grossed up dividend yield of 6.7%, almost three times that of the 10-year government bond.
Why would you look anywhere else for income than the share market?
That said, Telstra shares are not without risk. They are trading at a lofty multiple of earnings, especially in comparison to their modest growth rate. They operate in an increasingly competitive environment.
But as a pure income play, in comparison to the other options out there, Telstra shares, and indeed many dividend-paying ASX stocks, look very attractive.
It should be said not everyone is on the "cut interest rates" express train.
According to Saul Eslake, the heavy lifting has already been done by the RBA, and another cut in interest rates would be insane.
As quoted in the AFR, Eslake says the problems afflicting the economy are being caused by weak productivity growth, high costs and a lack of confidence in our nation's politicians.
And cheaper money isn't going to solve those problems. Sadly.
Here's our biggest problem — Australian house prices are too expensive.
As a nation, we're far too indebted. As a nation, too much of our disposable income is going on housing costs, either in the form of mortgages or rent. There's more to life than spending the majority of your monthly pay on accommodation costs.
Meanwhile, the further the RBA cuts interest rates, the higher house prices go, largely driven up by income-hungry property investors.
It's unlikely to end well for investors buying at today's highly elevated property prices — and that's before the government starts meddling with negative gearing and/or capital gains tax on property.
Yet despite all that, an investor needs income.
Come in equities, and dividend-paying stocks. Come in ASX 6,000.
I'm not talking the highly popular bank stocks, mind you. They are already highly leveraged to Australia's over-priced property market.
I'm talking mid-tier dividend paying stocks — the next frontier for income-hungry investors.
In June last year, in this very space, I highlighted RCG Group (ASX: RCG) as a stock on my radar.
At the time, the shares were trading at 57 cents, their forecast fully franked dividend yield being 7.8%, over 11% when grossed up for franking credits.
Today, shares in the owner of the Athlete's Foot chain trade at $1.03, an 80% jump in just 10 months, the fully franked dividend being the icing on the cake.
Sadly, I didn't buy any RCG shares for my own account, something for which I've only got myself to blame.
I did however, buy shares in another retailer, taking my cue from Andrew Page, our resident dividend expert.
Three months ago, he recommended subscribers to his Motley Fool Dividend Investor subscription-only stock picking service buy shares in Australian Pharmaceutical Industries (ASX: API), the company behind the Priceline chain.
As part of my personal commitment to put a total of $100,000 of my own family's money behind Andrew's Motley Fool Dividend Investor picks, in January I bought $15,000 worth of API shares, paying 85 cents per share.
Fast forward to today and API shares are trading at $1.77, a 108% gain in less than three months, turning my $15,000 into over $31,000… and that's not including the fully franked dividend.
After its stellar run, Andrew currently rates API a hold.
Not so four other stocks on the Motley Fool Dividend Investor scorecard, including one I bought just a few days ago.
It trades on a fully franked dividend yield of 5%, is growing quickly, and to date has been flying totally "under the radar" of most ASX investors.
On that latter point, I get the sense it might be about to be "discovered" by more than just the lucky few Motley Fool Dividend Investor subscribers. Its shares are already up 14% from when Andrew first recommended them, including a 3% jump on Thursday and another almost 3% hike today.
In today's market, it's hard to keep a good dividend stock down.
