The Australian Bureau of Statistics released Australia's quarterly inflation data on Wednesday, reporting headline inflation came in stronger than most expected. Core inflation was slightly weaker than consensus, but with headline inflation on track for an annual rate of 1.3%, analysts and commentators believe the end of the interest rate cutting cycle is nigh.
As such, the prospects of no further action by the Reserve Bank of Australia (RBA) fuelled a broad-based sell-off on the S&P/ASX 200 Index (ASX: XJO) on Wednesday, as investors digested the implications of stronger inflation.
Notably, traditional yield stocks such as Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS), Sydney Airport Holdings Ltd (ASX: SYD) and Wesfarmers Ltd (ASX: WES) were savaged as investors rotated out of risky assets to cash in the hope of interest rate stability.
With most stocks on markdown as a result, I believe income-focused investors should look to stocks with safe, growing dividends like Sydney Airport and Wesfarmers.
Here's why.
Sydney Airport
It's hard to talk about stable income streams and look past Sydney Airport as the preferred pick for reliable income. As the owner and operator of Australia's busiest airport – Sydney's Kingsford Smith Airport – Sydney Airport is in prime position to ride the tailwinds of tourism growth in Australia. The company has increased distributions for the last five years and forecasts further growth in 2017, making for a stock with growing yield potential.
Whilst I'm cognisant that Sydney Airport shares (alongside fellow infrastructure star Transurban Group (ASX: TCL)) trade at nose-bleed multiples, Australian listed infrastructure companies trade at discounts of about 15 to 20 percent compared to unlisted assets of global counterparts according to reports in the Fairfax Press on Wednesday. This is based on research by the chief investment officer of infrastructure at CBRE Clarion Securities. This implies that the Australian market demands a greater return for risk.
Although I'm not insinuating that Sydney Airport's share price should trade 15% higher, what is important to note is that the global market accepts higher multiples for the safety of infrastructure. Accordingly, investors should buy Sydney Airport with confidence, knowing it is cheap on an asset level, relative to international peers.
Wesfarmers
Wesfarmers' shares plummeted the most since the GFC as the supermarket, retail, and mining conglomerate revealed slowing sales growth in its largest income earner, Coles.
As a first sign that Woolworths Limited's (ASX: WOW) fight to regain market share in the lucrative supermarkets division is taking shape, Coles reported a mere 1.8% sales growth in food and liquor, representing its third consecutive quarter of slowing growth.
Importantly, Wesfarmers' other star retail divisions Bunnings, Kmart and Officeworks continued to perform well, implying that the diversified giant still has a stranglehold over the respective hardware, discount retail, and stationery markets. This makes me think all is not lost yet, despite its rich price-earnings of 18x.
Accoridngly, if Wednesday's 5.7% slump is the start of a larger sell-off, I'd recommend investors keep a close watch on the West Australian giant to find an attractive entry point that is compensated with sufficient yield.
Foolish takeaway
Although Wednesday's broad-based sell-off appears to be driven by macroeconomic factors, investors must remember that the recent inflation data does not translate to an imminent rise in interest rates just yet. Even though it's likely that the RBA won't cut the cash rate further from here, the alternative to safe yield (aka bank deposits) sits at a paltry 3%.
This means income-reliant investors will inevitably need to chase high-yield shares to earn a solid income stream. With both Sydney Airport and Wesfarmers increasing in (stable) yield, investors should keep an eye on them for bargain opportunities.
