For many people, a falling interest rate can be something of a gift and a curse. On the one hand, it tends to have a positive impact on share prices and the economy, with a lower interest rate encouraging people to go out and spend as well as invest. On the other hand, though, it means that interest on cash balances falls and, in time, can equate to a negative real return.
A possible solution to the problem of falling interest rates is high yield shares. They are likely to share in any wider market surge, while also helping income-seeking investors to generate a decent return from their capital. Certainly, they come with more risk to capital than is the case for cash, but the risk of a negative real return seems to be increasingly high with the RBA apparently willing to go even lower with interest rates.
With the above in mind, here are three stocks that offer fat yields as well as bright long-term futures.
AMP Limited
Shares in AMP Limited (ASX: AMP) are now sitting at their highest level in five years, having made gains of 72% since their June 2012 lows. And, focusing on AMP's performance as a business, it's clear to see why, since the wealth management company has been able to increase return on equity to 12.7% in 2014 from 10.7% in 2013.
Furthermore, AMP continues to benefit from a buoyant ASX, with funds and fees increasing, while its share price benefits from having a very high beta of 1.61, which means that its shares should rise at a faster pace than the ASX during a bull market.
And, with a yield of 4.3% and a dividend per share growth forecast of 7.4% in the next year, AMP could be yielding as much as 4.9% in 2016.
Woolworths Limited
Despite shares in Woolworths Limited (ASX: WOW) hitting a two-year low, investors in the retailer should not be concerned about the sustainability of its shareholder payouts. That's because, while profitability is likely to come under pressure as no-frills supermarkets increase their market share and shoppers become more price conscious, Woolworths has considerable headroom at present to make dividend payments.
In fact, Woolworths has a seemingly sensible payout ratio of 70%. This means that profits could fall and still allow the company to make dividend payments and reinvest in the business. As such, Woolworths' current yield of 4.9% appears to be sustainable, with there being scope for long-term increases in dividends if falling interest rates have a positive impact on the retail environment.
National Australia Bank Ltd.
Challenges with its UK-based operations continue to plague National Australia Bank Ltd. (ASX: NAB), with the latest issue being a $40m fine from the regulator for inadequate treatment of customers regarding payment protection insurance (PPI) claims.
While this could hurt sentiment in the short run, NAB's bottom line is still forecast to rise at an annualised rate of 17% over the next two years. This should allow it to increase dividends per share by around 5.6% per annum during the same time period, which puts NAB on a forward yield of 5.8% (using financial year 2016's forecasts). And, while NAB has a price earnings ratio of 15.8 (versus 16.4 for the ASX), its strong growth potential means that its shares could continue to outperform the ASX, with them being up 14% (versus 8% for the wider index) since the turn of the year.
