Last week's decision by the Reserve Bank of Australia (RBA) to again hold the cash rate steady at 2.5% will do nothing to entice investors back to term deposits. At the moment National Australia Bank Ltd. (ASX: NAB) is offering a term deposit rate of 3.35% on a 12-month deposit, meanwhile if you buy shares in NAB, based on analyst consensus provided by Morningstar, in financial year (FY) 2015 the bank is trading on a forecast dividend yield of 6.2%.
The 'chase for yield' as it has been termed doesn't look like slowing anytime soon, in fact investors are likely to continue to favour high-yielding blue-chip stocks over bank deposits for some time given the RBA's stance to maintain a low interest rate for the time being.
While dividend income is regularly an important source of overall returns, investors should not discount the importance of capital gains either.
AMP Limited (ASX: AMP) is one blue-chip stock which looks well positioned to provide not just a healthy 5.3% dividend yield in FY 2015 but also the potential to provide reasonable capital gains over the medium term.
While in FY 2014 the diversified financial services firm is trading on a forecast price-to-earnings (PE) ratio of 15.4, these earnings are being depressed due to AMP's problematic wealth protection business. As investors look further out they will see the forecast PE ratio falls to 14.1 in FY 2015 and down to 13.5 in FY 2016.
The implied earnings growth over the two-year period for AMP is 14.2%. In comparison, NAB is forecast to grow earnings by 11.5% over its two-year period.
Foolish takeaway
AMP's flat share price performance over the past year (it's up 1%) compared with the 9% rise in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has arguably opened up a buying opportunity for investors. Investors should always demand a margin of safety in their purchase price, so AMP may not yet be quite cheap enough. However keeping the stock on a watchlist and monitoring it in case the share price drops, forecast earnings rise, or a positive outlook for FY 2017 becomes clear, would look to be a good idea.
