According to comparison website Canstar, six- and 12-month term deposit rates are yielding between 3% and 3.5% per annum. The big four banks offer rates well below this. The question many investors face, especially retirees, is how to increase returns in a low interest rate environment without risking the loss of capital.
While the loss of capital when investing in equities is always possible, here are five ASX stocks I believe should provide investors with a quality stream of income as well as the potential for capital growth:
- Flexigroup Limited (ASX: FXL): Flexigroup currently yields 4.8% with 100% franking and a 60% payout ratio. The diversified financial services company has a strong history of growing earning as well as dividends. The conservative payout ratio should see dividends maintained through difficult times during the economic cycle. The company is also attractively priced at around 12 times FY15 earnings with management forecasting mid-single-digit earnings growth this year.
- Woolworths Limited (ASX: WOW): Woolworths offers a fully franked dividend of around 5% with a 70% payout ratio. The retail giant has experienced a sharp decline in its share price based on slower earnings growth and increased competition. Although there is speculation the dividend may be cut in the future to fund the investment required to drive earnings growth, I don't believe this will be as dramatic as the market fears. The company is still extremely profitable and very attractively priced at these levels.
- Challenger Limited (ASX: CGF): Challenger currently yields around 4.1% with a 70% payout ratio. The company has solid history of increasing dividends and has also increased the level of franking recently with the next dividend expected to be 100% franked. Challenger continues to benefit from Australia's ageing population, which is looking for safe and secure incomes. The company dominates the retail annuity markets with 80% market share. The company is being valued at 11 times FY15 earnings, which is by no means expensive considering the growth opportunities available in the sector.
- WAM Capital Limited (ASX: WAM): WAM is forecast to yield over 7% fully franked. Since 2009, the company has had consistent earnings and dividend growth. The company has been one of the best performing fund managers on the ASX and consistently outperforms the market. The asset management team has a strong focus on capital preservation and delivering increasing dividends using risk-adjusted strategies. While the success of the company is closely linked to rising equity markets, WAM offers good diversification to quality companies with strong management credentials.
- Automotive Holdings Group Limited (ASX: AHG): Automotive Holdings Group yields a fully franked divided of about 5% on FY15 forecasts with a 75% payout ratio. The company is Australia's largest automotive retailer and provider of refrigerated transport and cold storage. Management has been able to produce consistent growth for the last seven years and is confident it can maintain this growth in the future. The company enjoys competitive advantages based on its large scale and economic moat. Although fully priced at current levels, any drop in the share price is a buying opportunity.
Foolish takeaway
With term deposit rates predicted to remain historically low for the foreseeable future, many investors will still be looking for higher yields in the stock market. The advantage of franking credits, especially for SMSF investors, should not be underestimated and many investors will be looking to maximise their returns with high yielding, fully franked stocks. While this strategy will undoubtedly come under pressure when interest rates do begin to rise, companies that have good growth prospects and are not reliant solely on their dividend yield for investment will continue to perform well.
