With Aussie interest rates now standing at just 2%, the interest income on savings accounts is rather poor. After all, with inflation being 1.5%, it leaves only a very small real return which, for many income-seeking investors, is simply inadequate for their spending needs.
Looking ahead, the reality is that interest rates are likely to move downwards. After all, they have been falling for a number of years and it appears as though the threat of a recession is likely to force the RBA's hand and provide an increasingly accommodative monetary policy. While a house price bubble may continue to be fuelled by this, it seems as though it is a risk worth taking in order to stimulate the domestic economy.
As a result of low interest rates, dividend-paying stocks can help to fill a void created by poor returns on cash balances. And, with the ASX tumbling by 12.5% in the last six months, there are a number of generous yields on offer, such as via Coca-Cola Amatil Ltd (ASX: CCL) and Australia and New Zealand Banking Group (ASX: ANZ).
The two companies currently yield 4.6% and 6.5% respectively and, best of all, there is scope for considerable dividend growth in future.
In the case of Coca-Cola Amatil, its business is on the cusp of significantly improved returns after it has successfully restructured and slashed costs so as to make itself more efficient and increasingly competitive. Certainly, this was a painful process, but after posting an annualised fall in its bottom line of 4% during the last five years it is forecast to deliver a rise in its bottom line of 6.3% next year. Key to this is an improved marketing strategy which includes an investment in pricing, packaging improvements as well as further cost savings which, over the next three years, are expected to hit $100m.
Similarly, ANZ's super regional strategy is expected to deliver strong growth for the bank as it expands its footprint into Asia, where growth rates are due to be higher than in the domestic economy in the coming years. That said, Australia and New Zealand also present opportunities for ANZ, with the bank reporting that both economies are performing well. And, with there being opportunities to expand its presence in key areas such as home lending and commercial banking, while also moving into regions where ANZ is underrepresented (such as New South Wales), its bottom line could prove to be highly resilient in future years.
This impressive financial performance from Coca-Cola Amatil and ANZ means that the two companies have ample headroom when making their dividend payments. In the case of Coca-Cola Amatil its dividends are covered 1.2 times by profit, with ANZ's shareholder payouts being covered 1.4 times by earnings. As such, with high yields, impressive outlooks and ample headroom when making dividend payments, both companies score well when it comes to their income appeal.
