Recent indications from the Reserve Bank of Australia suggest that its interest rate cutting cycle has drawn to a conclusion, but some economists aren't so sure, suggesting that further pain could be around the corner for term deposit holders and retirees.
As it stands, interest rates are sitting at just 2 per cent after having been cut by 25 basis points in February and May this year. At that level, most bond and term deposit holders are actually losing money on their savings by the time inflation and taxation are taken into account.
Now (as reported by the Fairfax press late last week) Nomura Australia rate strategist Andrew Ticehurst believes the RBA will be forced to cut interest rates for a third time by November, in a move that would take the cash rate to a new record low of 1.75 per cent.
Meanwhile, Fairfax has also reported that economists from Capital Economists believe interest rates will fall to just 1.5 per cent by the end of the year, based on the belief that Treasurer Joe Hockey's latest Federal Budget lent support to further easing in monetary policy.
Although they stand as the minority, with most other economists believing the latest rate cutting cycle has drawn to a conclusion. The Australian dollar remains stubbornly high – currently above the US80 cent mark; the unemployment rate remains near a 12-year peak; commodity prices are under pressure and inflation remains low.
While holding cash might seem like a safer option than holdings stocks, it's not so safe when it's actually losing value sitting in the bank account.
Instead, investors are recognising the growing need to put their money to work in equities – particularly those that also offer fully franked dividends.
Not so simple
Traditionally, when someone utters the words 'fully franked dividends', people automatically think of companies such as the Big Four banks or Telstra Corporation Ltd (ASX: TLS). Indeed, these stocks have generated enormous returns for investors in recent years, but their time in the limelight appears to be nearing an end with each stock having arguably become overpriced.
Luckily, there are still plenty of great opportunities out there, including (but not limited to) QBE Insurance Group Ltd (ASX: QBE), Woolworths Limited (ASX: WOW) and even Collection House Limited (ASX: CLH).
While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has surged higher in recent years, QBE Insurance Group and Woolworths have both lagged significantly behind, but are looking attractive in terms of a long-term investment from today's prices. The pair are offering fully franked dividend yields of 4.8% and 3.4% respectively, which should only improve over the coming years.
Collection House is a much smaller company than either QBE Insurance Group or Woolworths, which in itself is an advantage. The debt collection business has an impressive track record for earnings and dividend growth, and is currently forecast to distribute 9 cents per share this financial year, equating to a 3.9% fully franked dividend yield.
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