As widely expected, the Reserve Bank of Australia (RBA) held the official cash rate at a record low of 1.50% on Tuesday. Australia's central bank cited low inflation and anaemic GDP growth as sufficient reasons to keep interest rates on hold in February.
Whilst this policy stance did not come as a suprise, investors interpreted Philip Lowe's statement as a signal that low interest rates are here to stay in 2017.
Yield rally
The announcment led to a modest recovery in the S&P/ASX 200 Index (ASX: XJO) (from before the announcement) as buying in yield stocks like Telstra Corporation Ltd (ASX: TLS) and Sydney Airport Holdings Limited (ASX: SYD) took hold to steady the ship.
Notably, another bond-proxy – Transurban Group (ASX: TCL) – was one of the biggest gainers of the day as it was buoyed by a solid half-year result and a 13.2% increase to distribution guidance. Transurban's shares closed almost 6.4% higher on Tuesday, as income-starved investors piled into the toll road behemoth for the prospect of a growing yield.
Tuesday's rally means Transurban's shares currently trade on a forward-yield of 4.6%, pricing in most of the short-term gains in my opinion. Nevertheless, investors looking for safe and growing yield like Transurban should consider Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP) ("SCA") and Retail Food Group Limited (ASX: RFG) as an alternative. Here's why.
Shopping Centres Australia
Woolworths Limited's (ASX: WOW) REIT spin-off SCA also released half-year results on Tuesday.
Like Transurban, the property giant increased its distribution guidance for the full-year. Management now intends to pay 13.1 cents per unit for the full-year, up 7.4% on prior year, and 0.5 cent higher than previous guidance.
SCA pointed to strong funds from operations growth of 9.6%, and a decrease to its management expense ratio as cause for the increased guidance. Whilst statutory net profit surged 125.4% on the back of one-off property revaluations, the underlying business remains robust with management indicating growth can continue as speciality retail sales perform well.
Accordingly, with its net tangible asset backing of $2.12 per share, SCA's Tuesday close of $2.25 provides a handy (and growing) yield of 5.8% with sufficient support against downside risk.
Retail Food Group
Retail Food Group is arguably the poster-child for growing yield, having increased dividends for the last 10 years in a row.
Shares in the vertically integrated pizza, café and bakery owner trade on a trailing yield of 4.34% (fully-franked), based on Tuesday's close of $6.35. Whilst I am aware this yield is currently below Transurban and SCA's forecast yield, investors must remember that the former companies have released results. Retail Food Group is slated to report results in the last week of February.
Retail Food Group's management has already indicated net profit after tax growth for the year will be circa 20%. The company enjoyed a credible Christmas trading season, boasting same store sales growth and average transaction value growth of 1.5% and 2.3%, respectively (for the first 19 weeks of trade).
Although this does not mean that Retail Food Group will definitely increase its dividend, given management's track-record and the company's strong start to 2017, I'm inclined to think it can continue.
Foolish takeaway
Tuesday's interest rate decision indicates that Australians are unlikely to see an increase to the cash rate for the better part of 2017. Accordingly, investors looking for income are likely to turn to high-yield stocks which provide room for capital and dividend growth.
Whilst blue-chips Commonwealth Bank of Australia (ASX: CBA) and Wesfarmers Ltd (ASX: WES) are likely to provide solid income streams, I'd prefer to buy stocks which offer prospects of capital and dividend growth over the long-term (albeit at lower yields today). As such, SCA and Retail Food are top of my buy list.
