Another day, another new high for US markets, the S&P 500 index closing at a new record high for the 42nd time this year.
No such joy for the ASX.
The S&P/ASX 200 Index is up a pathetic 1% so far this year, and is light years away from its record high, reached way back in October 2007.
So much for our 23 years of uninterrupted economic growth, and our strong Aussie dollar, huh?
Some lucky country…
The solution?
You may have seen the shocking headline in yesterday's The Sydney Morning Herald…
Research analysts Damien Boey and Hasan Tevfik say the current cash rate of 2.5% is too high considering broad softness in the economy, saying…
"We believe that the RBA is not done with its easing cycle. We think that the bank needs to cut rates below 2 per cent."
Think about what interest rates of 1.5% might do to the income you currently generate from your term deposits.
Lest you think I'm being alarmist, that's the level Credit Suisse's modelling suggests the cash rate needs to fall to address current weakness in the Australian economy.
If you thought earning $3,000 per year on a $100,000 term deposit was bad enough, try lowering that to just $1,500.
It doesn't even cover the annual rates bill.
Who knows if the Credit Suisse investment bankers will be right. It certainly feels like the economy is going through a tough patch — high unemployment, plunging iron ore prices and low consumer confidence.
Under 'normal' circumstances, such economic conditions would be conducive to a cut in interest rates.
The only thing possibly holding the RBA back is the house price boom.
But perhaps not for too much longer, especially if high-profile economist Saul Eslake is right. The Age quoted him as saying house price growth will 'decrease markedly' next year.
Dividend stocks, anyone?
Dividends become all the more attractive in this ultra-low interest rate environment.
For Australian investors, adding in the enormous tax benefits of the dividend imputation system, and buying stocks yielding 5% or more, fully franked, becomes virtually a no-brainer investing decision.
Take Telstra Corporation Ltd (ASX: TLS), for example, a stock I already hold.
The country's leading telco trades on a fully franked dividend yield of 5.1%, which grosses up to 7.3% when franking credits are taken into account.
Let me see — 1.5% in a term deposit (taxable) or 7.3% in Telstra shares.
Hmmm…
I already own Woolworths Limited (ASX: WOW) too.
Now to be honest, I can't say I'm overly excited about the company's growth prospects.
Masters Home Improvement is looking increasingly like a $1 billion black hole. Competition from Coles (owned by Wesfarmers Ltd (ASX: WES)) is hurting the supermarket business, and German invader Aldi is gaining more and more traction with the budget conscious Australian shopper.
But the dividend. Oh the Woolworths dividend. Trading on a fully franked dividend yield of 4.1%, or 5.85% grossed up for franking credits, compared to term deposits, it's simply too good to pass up.
And then there's Andrew Page's latest dividend-paying stock recommendation, trading on a fully franked dividend yield of 5.4%, or 7.7% grossed up for franking credits.
Andrew is the lead analyst on our brand new stock advisory service, Motley Fool Dividend Investor. Thousands of your fellow ASX investors have already joined, no doubt keen to fight back against these persistently low interest rates.
And given the comparison to term deposits, who can blame them.
Not one to miss out on the party, I've committed to investing $100,000 of my family's money behind the Motley Fool Dividend Investor stock picks.
The strict Motley Fool trading rules have so far prevented me from buying either of Andrew Page's first two picks, but not for much longer.
At the best of times, it's never too late to buy high quality, dividend paying stocks… even more so at times of low, and potentially falling interest rates.
That's me. I'm sold.
So what's holding you back?
Volatility?
Fear?
Inertia?
Let me help…
Instead of being fearful of what might happen, simply embrace the incredible power of compounded returns.
Instead of worrying about those pesky day to day movements of share prices, simply focus on those steady, reliable and rising fully franked dividends… and the massive tax advantages that come with them.
Study after study shows that dividends matter with respect to returns — dividend-paying stocks outperform non-dividend payers…
- In the US, Professor Jeremy Siegel found that from 1926 to 2008, 97% of the S&P 500's total return came from dividends.
- Here in Australia, according to AMP Capital Investors, dividends have delivered just over half of the 12% a year total return from shares over the past 114 years.
- Again in the US, research from Ned Davis Research suggests that over long periods of time, the stocks of companies that pay dividends considerably outperform those that don't: 10.2% per year vs. 4.4%.
Never truer was the old saying a picture paints a thousand words.
