Will they, won't they, who cares…
Those are the three camps segregating individuals when it comes to the Reserve Bank of Australia's (RBA) next move.
I'm willing to bet most readers fall into the last category – I know I certainly do.
Even if you have or are contemplating starting a mortgage, the 0.25% you may or may not save – assuming the banks pass on any cuts to you – likely isn't high up your list of priorities.
However you should set aside a few moments to contemplate the effects it will have on you, for two reasons.
- You won't miss the savings
If the cut doesn't happen, you'll pay the same on your loan. If rates do fall, you could keep paying that same amount of money and get ahead on your loan, or contribute to your financial future another way, such as in the stock market.
- Dividend stocks could be set to soar… again
A cut in rates will lead income-focussed or cash-heavy investors into the ASX, where no doubt they'll gravitate towards the usual suspects – Commonwealth Bank of Australia (ASX: CBA), or Telstra Corporation Ltd (ASX: TLS).
Neither company is particularly good value at present prices, and I recently selected Commbank as an overvalued stock I would consider selling right now.
Instead of buying popular companies trading at elevated levels, look a little further afield for your income.
Woolworths Limited (ASX: WOW) is a famed blue-chip income stock, and while it's out of favour at the moment it trades on a price to earnings (P/E) equation of 14 – below the ASX average – and yields 4.9%, fully franked.
(Contributor Ryan Newman thinks right now is the best time to buy Woolworths – find out more in his article here)
FlexiGroup Limited (ASX: FXL) is growing faster than Woolworths and comes with more risk, but appears to be reliably increasing earnings and it offers a 5.1% fully franked yield.
FlexiGroup trades on a P/E of 12 which is quite low considering its growth and recent acquisitions in New Zealand.
Sonic Healthcare Limited (ASX: SHL) is the most expensive stock of the three, but also boasts highly defensive healthcare earnings, a long record of growth, and highly appealing foreign income streams.
A first half earnings miss was a minor concern, but the company enjoys long-term tailwinds thanks to ageing populations, and has plenty of opportunities for expansion in its overseas markets.
Trading on a P/E of 21 and yielding 3.4%, partially franked, Sonic looks like another great long-term buying opportunity.
But of course dividend yields don't tell the whole story – what income-focused investors should really be chasing is growing dividends. Just ask shareholders in Woolworths Limited – those who participated in its launch back in the 90's are sitting on a ~25% per annum dividend today.
It's how Warren Buffett made his billions, and you can do it too; just buy and hold, and let compounding do the rest.
Find out more on the magic of compounding and discover just how you could turn $1,000 into $7 million in The Motley Fool's free report How Everyday People Can Invest Like Buffett.
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