The Reserve Bank of Australia has interest rates pegged at a record-low 2%.
That means your term deposits and fixed income investments could be losing money when adjusted for the 1.7% inflation rate and your marginal tax rate.
Conversely, following a recent malaise in the local share market, dividend yields from reputable companies appear excellent value.
Here are two stocks that should be on investors' watch lists.
- Woolworths Limited (ASX: WOW) – forecast dividend yield: 5.2% fully franked
Grossed-up for its tax-effective franking credits, Woolies shares yield an impressive 7.46%. While there is always the risk of falling share prices, Woolworths has rallied 7.5% over the past month on the back of heavy selling pressure in recent months. At today's levels, there is still valuation upside in shares of the $34 billion retail giant.
- Telstra Corporation Ltd (ASX: TLS) – forecast dividend yield: 5.62% fully franked
Telstra is arguably the ASX's premier dividend stock. Indeed, thanks to its commanding market share of mobiles, pay-tv, fixed broadband and everything in between; Telstra pays a whopping grossed-up dividend equivalent to 8.02% and still manages to reinvest in itself. Payments from the government's NBN Co and an expansion into Asia bode well for long-term returns from the $69 billion company.
Buy, Hold or Sell?
At today's prices, Telstra and Woolworths shares could comfortably find a place in long-term investors' portfolios – especially for those seeking income to offset record-low interest rates. However, I've previously said that neither Telstra nor Woolworths' shares are a bargain at today's prices. I'd like to see Telstra closer to $5, and Woolworths trend back below $25 before buying in.
