As widely expected, the Reserve Bank of Australia (RBA) held the official cash rate steady on Tuesday at 1.5%. The RBA cited an improving global economy and strengthening demand for raw materials as reasons for leaving interest rates on hold in hoping that the current monetary policy is sufficient to spur economic growth in Australia.
Another view
Whilst the RBA believes Australia's economy is chugging along nicely, leading financial institutions National Australia Bank Ltd (ASX: NAB), Suncorp Group Ltd (ASX: SUN) and Westpac Banking Corp (ASX: WBC) appear to have a different view. These lenders (amongst others) have acted independently to lift interest rates on variable home loans 'out-of-cycle', and justified the increases by blaming the cost of capital and current low credit growth environment.
When reading between the lines, I believe these large lenders have taken the view that Australia's economy is strong enough to withstand further rate rises. Accordingly, I believe investors should brace for widespread 'out-of-cycle' interest rate hikes by positioning their portfolios for reliable income-generating stocks like Retail Food Group Limited (ASX: RFG) and Sydney Airport Holdings Ltd (ASX: SYD). Here's why.
Retail Food Group
Retail Food Group has gone from strength-to-strength as vertical integration (through its acquisition of Hudson Pacific) and horizontal expansion (into international markets) positions the food and beverage conglomerate for strong growth potential.
In its most recent update, management indicated another circa 20% growth in underlying net profit after tax (NPAT) as average transaction values and same store sales grow in all regions.
Although a rise to interest rates from lenders could affect growth through a lack of disposable income (as mortgage repayments rise), I believe Retail Food Group's international diversification and relatively strong brands should insulate its business from any material downturn in discretionary spend.
Accordingly, with the stock trading on a growing dividend yield of 4.5% (fully franked), investors could do a lot worse for returns in the current low rate environment.
Sydney Airport
Sydney Airport has been on the nose with investors of late, as infrastructure stocks lose their 'bond proxy' lustre on prospects of higher inflation. Even so, as Monday's takeover offer for DUET Group (ASX: DUE) demonstrates, the reliability of infrastructure assets remains highly coveted by some long-term investors and Sydney Airport should be no exception — even if interest rates rise.
Sydney Airport's monopoly position as Sydney's only airport operator should see it continue to ride the tailwinds of tourism growth to churn out higher distributions.
With the group recently announcing its estimated final distribution to be 16 cents per stapled security, Sydney Airport remains on track to deliver a handy 4.9% yield. This yield would grow substantially if current year growth rates are maintained, making it worth a second look at current prices.
Foolish takeaway
Although Tuesday's rates decision indicates the RBA won't be lowering interest rates any time soon, it also implies they won't be quick to raise them either.
Whilst banks can independently raise interest rates, smart investors should focus on the long-term trends of a business rather than the short term 'noise' Mr Market generates.
Accordingly, I believe investors would be well served buying reliable income stocks like Retail Food Group and Sydney Airport.
