With the ASX falling by 8% in the last six months, Aussie investors may be of the view that cash is king. Although cash's value can be eroded a lot quicker than you may realise.
That's because, while inflation currently stands at just 1.5%, the RBA is seemingly intent on reducing interest rates to stimulate growth. Therefore, the rise in the price level may pick up over the medium term. As such, cash balances could gradually become worth a lot less than they are now in real terms, since higher inflation plus lower returns is a rather challenging combination for cash to overcome.
That's why, even though it has posted a disappointing performance since the turn of the year, the ASX is a great place to invest spare cash at the present time. For example, diversified retailer, JB Hi-Fi Limited (ASX: JBH), has delivered a capital gain of almost a third since the turn of the year despite the pessimistic outlook for the wider economy. And, best of all, it currently yields 4.3% from a dividend that is sustainable, with it being covered over 1.5 times by profit.
Looking ahead, JB Hi-Fi is expected to increase dividends per share at an annualised rate of 4.9% during the next two years. That should beat inflation and mean that the spending power of your income from holding the stock will increase over time. And, with a cut in interest rates likely to have a positive impact on consumer confidence and consumer spending, JB Hi-Fi's sales and profitability could gain a boost, with the company's bottom line forecast to rise by over 5% during the next two years. Furthermore, with JB Hi-Fi trading on a price to sales (P/S) ratio of just 0.57, it is cheaper than the wider retailing sector, which has a P/S ratio of 0.69.
Similarly, investing surplus cash in Insurance Australia Group Ltd (ASX: IAG) seems to be a wise move, with the company currently yielding a fully franked 5.5%. Unlike JB Hi-Fi, though, IAG's dividend is set to flat line in the current year, with earnings due to tick downwards by 0.7%. That's partly because the insurance market in Australia is becoming much more competitive and, as a result, IAG is looking to Asia for potential growth opportunities. This appears to be a wise move since it not only improves the company's diversity, but also increases its exposure to a fast-growing region for financial products.
Furthermore, IAG trades at a discount to the wider insurance sector, with it having a price to earnings (P/E) ratio of 14.4 versus 17.9 for its sector. As such, it could be the beneficiary of a rating expansion, with its excellent yield likely to act as a major draw for income-seeking investors as a loose monetary policy begins to have effect.
So, while holding cash may seem like a good idea at the present time, investing in the likes of IAG and JB Hi-Fi could produce higher income and total returns over the medium term.
