Interest rates are at record lows across the developed world. And they’re likely to remain low — or fall even further — in 2015. Earlier in the week, Business Day ran the following headline: ‘Banks cut deposit rates’.
Some, like ANZ, have dropped their savings deposit rates by as much as 20 basis points (that’s 0.2%) since December.
If you’ve been following along with the DR, this shouldn’t come as a surprise. Though if you have significant cash savings, it’s certainly not welcome news. But don’t expect any rate hikes this year…or next.
As you’re likely aware, the deposit rates your bank pays you are linked to the Reserve Bank of Australia’s (RBA) official cash rate. And you’ll be hard pressed to find anyone predicting a rise in the RBA’s current 2.5% rate.
This also from Business Day:
‘Data from research house Investment Trends found that the percentage of investors who expected the official cash rate to fall skyrocketed from 4 per cent in August to 30 per cent last month… The research comes as the wider market tips an 80 percent chance of an interest rate cut next month.’
Even the more conservative bets are on the RBA sticking with 2.5% throughout 2015.
Commonwealth Bank of Australia (CBA) economist Michael Blythe states that he now doesn’t expect an interest rate rise until 2016. As CBA had initially predicted a rise this year, that expectation may well shift yet again to 2017…or beyond.
Now as a contrarian investor and economist, I’m not one to jump on any old bandwagon just to be part of the crowd. In fact, I’d much prefer to run against the crowd and trumpet a pending rate rise. But in this case I’ve got to agree that rates aren’t going anywhere soon, except possibly down.
Deflationary pressure — driven in large part by plummeting commodity prices — is building across the developed world. Oil is down a whopping 55% in just six months. 55%! And the Eurozone is now officially in deflation for the first time since the fallout from the GFC more than five years ago.
Here in Australia, the most recent inflation figures for the third quarter of 2014 came in at 2.3%. I’d expect to see a lower figure for the fourth quarter, with a further fall likely in 2015. With significant deflationary forces at work, any kind of interest rate increase is off the table.
So…how do you make your money work for you in this low interest environment? In the equity markets, that’s mainly capital gains and dividends.
At the Albert Park Investor’s Guild, our last three recommendations all have a track record of paying regular, healthy dividends. This is no coincidence. It comes as a direct response to requests we received from members looking for a reliable income stream.
The ‘hidden’ dividends that one of these companies pays are particularly impressive. These generous special dividends have ranged from $1.20 to $4.50 per share since 2008. That’s an average special dividend yield of 7.4% per year. And that’s on top of the standard 1.9% dividend the company pays. Put it all together and you have an average annual yield of 9.3%.
Not too shabby compared to what you’ll get from your bank.
S&P/ASX 200 Index versus the ASX 200 Accumulation Index
As mentioned, capital gains and dividends are two ways you can generally expect to make money in the equity markets.
Now many people — myself included — often point to the S&P/ASX 200 Index as a broad indication of how Australian stocks are performing. But what you’re missing with this index is dividend payments.
This can make a huge difference.
In 2014, for example, the S&P/ASX 200 gained 1.1%. That underperformed the much less risky option of cash in a term deposit. In fact, it even fell short of inflation.
The ASX 200 Accumulation Index, on the other hand, includes dividend payments. And it returned a much more robust 5.7% in 2014. A quick bit of maths gives you a 4.6% average dividend payment across all companies in this index last year.
A 4.6% dividend payment is not bad in today’s low interest environment. That’s particularly true if the company is growing and its share price is going up as well. But it also shows you what a great opportunity the Guild’s Investment Director, Meagan Evans, unearthed with the above mentioned company paying ‘hidden’ dividends.
A 9.3% average annual dividend is, well, more than twice as good. And these are precisely the types of businesses Meagan scours the world’s indexes for. If you want to know more, here’s a great place to start.
for The Daily Reckoning Australia