With the RBA seemingly willing to move interest rates down before they move them up, it may be prudent for Aussie investors and savers to accept that rates are likely to remain low for a good while yet.
This means that the interest earned on savings accounts could remain frustratingly below inflation in 2015 and beyond, with the capital value of your cash likely to decline in real terms.
However, there is a potential solution to the challenge of low rates and it comes in the form of high quality ASX stocks that have excellent income potential. With that in mind, here are three companies that could, over the medium to long term, more than make up for a disappointingly low interest rate.
Commonwealth Bank of Australia
With a fat, fully franked yield of 5.1%, it’s clear to see why Commonwealth Bank of Australia (ASX: CBA) has considerable income appeal. After all, its annual payout is higher than the inflation rate, interest rate, and even the ASX’s dividend yield of 4.6%.
However, there could be much more to come from CBA in terms of income. That’s because it has an excellent track record of dividend per share growth, with dividends growing at an annualised rate of 12% over the last five years. Indeed, they are set to increase at a further 5.2% per annum over the next two years, which means that CBA could be yielding as much as 5.5% in FY 2016.
With dividends being well-covered at 1.3 times, CBA could be a top stock to boost your income at the present time and over the medium to long term.
Woodside Petroleum Limited
With a fully franked yield of 5.8%, Woodside Petroleum Limited (ASX: WPL) appears to be an even more attractive income stock than CBA. After all, it has increased dividends per share at an annualised rate of 15.8% over the last five years, which is also ahead of CBA’s historic dividend growth rate.
However, it seems as though Woodside Petroleum has gone too far, too fast with dividend growth, since they are currently not covered by profit. Clearly, this situation is unsustainable, so Woodside Petroleum is reducing its dividends over the next couple of years, and is forecast to cover them 1.3 times in FY 2015. Encouragingly, this puts it on a much stronger financial footing moving forward.
Despite this planned fall in dividends, Woodside Petroleum still offers an excellent yield. Furthermore, with earnings due to increase by 15.4% per annum over the next two years, dividend growth is likely to return eventually, so as to make shares in the company a highly lucrative income play.
Ramsay Health Care Limited
At first glance, Ramsay Health Care Limited (ASX: RHC) lacks appeal as an income stock. After all, it currently yields a paltry 1.8% (fully franked). However, with earnings forecast to rise at an annualised rate of 17.3% over the next two years, dividends could be set for a rapid increase.
Indeed, Ramsay is fairly conservative when it comes to paying out profit to shareholders in the form of a dividend. For example, its current payout ratio is just 52% and this means that dividend per share rises could be hiked without compromising the company’s ability to reinvest in its future.
With such strong earnings growth prospects, Ramsay’s dividends per share are expected to increase by 15.8% per annum over the next two years. This means it could be yielding 2.2% in FY 2016, with much more potential growth to come.
5 stocks under $5
We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.
And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!
*Extreme Opportunities returns as of June 5th 2020
Motley Fool contributor Peter Stephens does not own shares in any of the companies mentioned.
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