Christmas came two months early for dividend investors on Wednesday.
They've been waiting on hands and knees since May for a third official interest rate cut, and now it looks like they could finally get what they've been asking for.
Chances of an official interest rate cut exploded shortly after 11:30am AEDT when the Australian Bureau of Statistics released some rather concerning data regarding the Australian economy.
Ordinarily, the release of such figures would have a negative impact on investor sentiment, but not these days.
These days, high-yield dividend stocks such as Telstra Corporation Ltd (ASX: TLS) or Westpac Banking Corp (ASX: WBC) can tend to jump on bad news, providing a nice boost for the S&P/ASX 200 (ASX: XJO) in the process.
Why?
Because investors are keen for further easing in monetary policy.
A lower cash rate will likely force more individuals back into the market in search of higher returns, thus pushing the share market higher.
The RBA's chief, Glenn Stevens, has been pretty strong-willed in recent months, not giving into the market's demands. But Wednesday's news could well be enough to force him to reconsider.
The financial markets certainly seemed to think so.
According to The Australian Financial Review, the market was soon pricing in a 52 per cent chance of an official interest rate cut on Melbourne Cup Day.
Bloomberg went one better. It said there's a more-than 60 per cent chance of a quarter-percentage-point rate cut next week, which could see our cash rate fall to just 1.75 per cent.
The data released by the ABS showed the consumer price index, which measures inflation, grew just 0.5 per cent during the September quarter, down from a rise of 0.7 per cent in the three months to June.
The CPI also rose just 1.5 per cent through the year to the September quarter. The AFR said it's the weakest run of inflation in 16 years.
The underlying inflation rate – a figure watched closely by Glenn Stevens and his fellow board members – is sitting at just 2.1 per cent.
It's within the RBA's target range of 2 to 3 per cent, just, but appears to be falling at a troubling rate.
To make matters worse, we're stuck with a 6.2 per cent unemployment rate. Commodity prices are low, and likely to go lower. And Australian wages are growing at a measly 2.5 per cent annually.
Consumer and business confidence levels also remain depressed – just ask shareholders of Dick Smith Holdings (ASX: DSH).
They watched their shares plunge nearly 34 per cent yesterday on the back of a major profit downgrade, citing "challenging and variable market conditions," together with tougher competition.
All in all, there's a pretty convincing case for another official interest rate cut. If not in November, then sometime in the very near future.
That's bad news for individuals and families relying on interest payments from the banks just to get by. For those people, making a meaningful return is going to become even more difficult, I'm sorry to say.
But for stock market investors, there are certainly reasons to be more upbeat.
You see, in periods of low interest rates, investors increasingly turn to the stock market for superior returns.
They focus mostly on companies offering solid, fully franked dividend yields, and also look for companies offering compelling growth prospects.
With the market still hovering well below its highs from April this year, there are certainly more of those presenting themselves today.
In fact, Scott Phillips, lead advisor for Motley Fool Share Advisor, released a brand-new recommendation just last week that ticked all those boxes.
Solid growth potential? Check.
A dirt-cheap share price? It's trading on an price/earnings ratio of just over 7x forecast earnings – Double Check!
And best of all, it offers a forecast 6.6 per cent dividend yield – fully franked, mind you. Grossed up, that's a yield of 9.4 per cent.
Check, Check, Check!
Compare that to the 3 per cent return you'd be lucky to get from the cash in your savings account, and there really is no competition.
Given its credentials, this company could well be featured in Motley Fool Share Advisor's upcoming Income Extra, which will hit members' inboxes at 4:30pm this afternoon, AEDT time!
This feature will highlight not just one, but five of the companies from the service's current list of "buy" recommendations that Scott and his team believe are the best buys now as far as dividends go.
If interest rates are to fall further, it's these kind of companies you'll want to be in your portfolio.
And if they don't fall?
Well, it doesn't seem like an interest rate hike will be on the cards anytime soon, either, so investors should sit back, get comfortable and enjoy their dividends.
