Interest rates remain at their record low of 2.5%, and could well be headed lower. The returns from term deposits and government bonds are as unappealing as ever, and to make matters worse, most of Australia's favourite dividend stocks like Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) have become wildly overpriced.
Although the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has been performing strongly, the index still remains far below its pre-GFC levels, indicating that there is still plenty of money sitting on the sidelines and earning below par returns.
The good news for that money is that there is a lot more to be made in the stock market. A number of analysts have pegged the ASX 200 to climb as high as 6000 points in the coming months – reflecting a 10% upside from today's level – and it could well be stocks like Insurance Australia Group Limited (ASX: IAG) that end up driving it there.
Offering a juicy 6.1% fully franked dividend, Insurance Australia Group's yield is even enough to take the breath of Telstra Corporation Ltd (ASX: TLS) or Woolworths Limited (ASX: WOW) shareholders.
As one of Australia's largest companies, with a market capitalisation of $13.7 billion, Insurance Australia Group is not only an excellent core stock to grip tightly, but it also offers fantastic growth potential! Having recently reaffirmed its guidance of a reported margin (a key measure of profitability for insurers) of between 14.5% and 16.5%, its planned acquisition of Wesfarmers Ltd's (ASX: WES) insurance underwriting business could also significantly boost earnings in the long run.
Although the company's shares have been travelling north for the last three months or so, they still remain more than 6% below their $6.25 October intra-day high. While they are no longer as cheap as they were in March (they sank as low as $5.34), now would still be an excellent time to buy the stock, particularly while interest rates remain low.
With interest rates set to remain low for some time yet, I've got a good feeling that investors are going to be putting their money behind unappreciated, defensive, high yielding stocks. While Insurance Australia Group is a good candidate for tomorrow's money, there is another stock which fits the description even more perfectly…
