With interest rates at 2% and possibly headed lower, investors are faced with the uncomfortable reality of term deposits and savings account rates that simply aren't good enough to retire on.
Many investors are increasingly looking to the stock market for yield and typically, they head straight for the big banks, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and Australia and New Zealand Banking Group (ASX: ANZ).
The psychological comfort that comes from owning big stocks is hard to beat – even though it may be an illusion in the case of the banks – but investors willing to look a little further can be rewarded.
Here's one big stock, one smaller stock, and one novel idea for investors looking to beat their savings account:
G8 Education Limited (ASX: GEM) – yields 7.2%, fully franked, pays quarterly distributions
Include the benefit of franking credits and G8 Education's yield beefs up to a staggering 11%, paid quarterly. Investors do take on greater risk for this reward, but G8 has reasonable cash flows and can afford it.
Shares have taken a hammering this year (which is why the dividend is so large) as a result of investor nervousness and fears of increasing government legislation that subsequently proved to be unfounded. With its business model intact and an expanding footprint in the childcare sector, G8 Education also looks like an attractive business to own for the long term.
Telstra Corporation Ltd (ASX: TLS) – yields 5.6%, fully franked, pays half-yearly distributions
Telstra is the dividend holy grail for many ASX investors, and the company has a track record of paying and increasing dividends thanks to its attractive semi-monopoly over the Australian telecom market.
Several competitors are now becoming large enough to challenge its incumbency, but Telstra has several ways to generate growth over the long term and looks to be a decent investment as well as a solid dividend stock.
Trading close to its lowest point all year, there's a lot to like about this 5.6% (8.1% grossed up) dividend yield.
AMP Limited's (ASX: AMP) Capital Notes hybrid security – yields ~7.2-7.4%, paid quarterly
As I wrote earlier today, AMP Limited is releasing a hybrid security – which it calls 'Capital Notes' – that will pay an estimated 7.2-7.4% floating rate coupon to Noteholders.
While I'm typically very bearish on hybrid securities – complex instruments beyond the ken of many investors given an opportunity to buy them – AMP's Notes do look to offer adequate compensation for the extra risk investors take on. As such they could be a useful way for more experienced investors to gain a supplementary income over the long term.
