Last week, the Reserve Bank of Australia gave investors what they so desperately wanted in another interest rate cut, but the market reacted swiftly to indications that may have been the last of them.
Since then, the Australian dollar has soared above US79 cents – away from the central bank's target of US75 cents – while the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has also entered a steep decline, led by the nation's most popular dividend-paying stocks.
While the market's wild activity over the last week or so has highlighted how dangerous it is to invest in stocks with the assumption the market will simply drive them higher (without future earnings prospects improving), it has also created an opportunity for investors seeking a solid income stream to make their move.
The Fairfax press quoted analysts from Macquarie Research as saying: "We remain of the view that the economy is likely to evolve in a way that warrants additional monetary policy support. Rate cuts are coming, but later."
While some seem to believe we could get our first interest rate rise sometime in 2016, others such as Macquarie Research, believe that the first rate hike won't come until "at least 2018", as reported by Fairfax.
Indeed, that is great news for dividend investors.
Unfortunately, that doesn't mean investors should go out and buy shares in Australia's biggest dividend payers, including Telstra Corporation Ltd (ASX: TLS) and the Big Four banks. Although all five stocks have been sold off en masse recently, they remain expensive investment prospects that could well have further to fall before conditions begin to improve.
But there are a number of other dividend-paying stocks which represent fantastic buys today, including QBE Insurance Group Ltd (ASX: QBE), Woolworths Limited (ASX: WOW) and Collection House Limited (ASX: CLH).
Woolworths' shares have been smashed over the last 12 months due to its lacklustre performance recently, but there are reasons to suggest the company's woes could be limited to the short term. As it stands, the stock is trading near a two-year low, giving investors an excellent opportunity to buy. At $27.14, the stock offers a fully franked 5.1% dividend yield, which equates to 7.3% grossed up.
QBE Insurance Group shareholders have also endured a tough run, although it appears the worst of it could finally be over. Although the stock has risen 23% since the beginning of the year, it's actually trading 35% lower over the last five years and is certainly worth closer investigation. The stock offers a 3.6% dividend yield, fully franked, and that is expected to improve considerably over the coming years.
Collection House isn't as well known as Woolworths or QBE, but that in itself is a huge advantage. The debt collection business has built a fantastic track record for revenue and earnings growth, a trend that I expect will continue over the coming years. At $2.25 and with a market capitalisation of just under $300 million, Collection House offers a 4% fully franked yield, which is generous for a growth stock.
