RBA tells savers: Switch to shares

Low deposit rates means the share market offers better opportunities

The Reserve Bank of Australia (RBA) yesterday inferred savers should look for assets that have higher returns than bank deposits. In a statement released yesterday, the RBA said, “… savers are facing increased incentives to look for assets with higher returns.

The highest interest savings accounts are currently paying just over 5%, but the majority of bank accounts pay little or no interest. Further cuts to the official cash rate by the RBA could see deposit rates fall even further. That could make it increasingly difficult for retirees to fund their retirement, and those living off the income from bank and term deposits.

For those who are prepared to take on extra risk, but the possibility of capital growth and dividends, there are currently around 140 companies in the S&P All Ordinaries Index (Index: ^AXAO) (ASX: AXAO) that paid a dividend yield of over 5% last year, and many of them are fully franked. That’s plenty of choice for investors.

Conservative investors might look towards the big four banks, plus the regional banks, Bank of Queensland (ASX: BOQ) and Bendigo and Adelaide Bank (ASX: BEN). Several utilities and A-REITs (property trusts) are also in the list, such as Envestra Limited (ASX: ENV) and Spark Infrastructure Group (ASX: SKI). Whilst those are not recommendations, and dividends can fall if companies fall on hard times, it illustrates that there are plenty of opportunities for savers to earn higher rates in the stock market.

There’s also the potential for capital growth (and falls). If investors stick to quality companies with the potential to grow earnings, they should see higher returns than cash in the bank. The opportunities in the stock market also mean there’s no real need to seek out hybrid or other fancy securities, which generally have little capital appreciation, and many only pay marginally above what you can get from ordinary shares.

The Foolish bottom line

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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