Likelihood of rate cut is pushing yield plays higher

With the increasing likelihood of a rate cut from the RBA and quantitative easing set to continue for the “foreseeable future”, investors have returned to the stock market.

This week, the S&P/ASX 200 (ASX: XJO) (Index: ^AXJO) has experienced solid increases of 3% as investors go in search of yield plays. The ASX’s top 20 members that pay healthy dividends have been regained some yards that were lost in June. Westpac (ASX: WBC) and NAB (ASX: NAB) are the best performers out of the yield plays, up over 3% in the past five days.

However, investors aren’t being fooled by Telstra’s (ASX: TLS) higher price to earnings and lower yield and as such, its movements have underperformed the benchmark and risen only 1.5% for the week.

Meanwhile, investors looking for great income plays outside of biggest stocks have reaped the rewards of the extra risk. Metcash (ASX: MTS), which pays a dividend of around 7.7% fully franked, has risen over 3% this week.

As rates drop, term deposits become less attractive and investors look outside fixed income securities for higher yields, but most don’t want to commit all of their nest egg to the volatile stock market. As the past few months has shown, diversification is extremely important, both in terms of asset allocation and within the assets themselves.

Foolish takeaway

Investors shouldn’t rule out smaller companies outside the top 50, nor should they invest too heavily in small or micro caps. Investing in smaller companies comes with considerably more risk but you can be expected to get rewarded for that risk. It’s important to also remember that stock market investing is a game of patience and it doesn’t cost you money to take your time before choosing to invest. That said, time has proven that no one can predict short term fluctuations in prices although it has shown investing for the long term is a sure way to build your wealth.

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Motley Fool contributor Owen Raszkiewicz owns shares in Metcash. 

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