Interest rates were left on hold when the Reserve Bank met yesterday but there is growing speculation that their next move could be downward.
With iron ore and oil prices both crashing, inflation will likely decrease. Combine that with a steadily increasing unemployment rate and cooling house price growth and the very mention of the word "recession", and the RBA will have the green light to lower rates.
The futures market is already starting to reflect an increasing chance of a rate cut while a number of economists have also changed their tune more recently. While some are suggesting two cuts down to 2%, others are suggesting it could fall even further than that.
If that happens, there are two things you can be almost certain of…
- Term deposits and government bonds will be the last place you'll want to have your money as the returns will only weaken
- High yield dividend stocks will skyrocket
As interest rates drop, investors increasingly turn to the equities market for superior returns. Not only could we see the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) finally bust through the 6000 mark, it would likely be the high-yield stocks that will get us there. But unlike last time, where companies like Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) helped force the market higher, it will likely be some of the less recognised stocks that act as the driving force.
As a perfect example, Coca-Cola Amatil Ltd (ASX: CCL) could be one of the best dividend stocks you could buy right now. A tough couple of years has the shares trading at a very compelling price, with conditions tipped to improve considerably in FY15. The stock offers a bubbly 4.6% dividend yield which is franked to 75%.
Before interest rates decline, investors should also take a look at M2 Group Ltd (ASX: MTU) and JB Hi-Fi Limited (ASX: JBH). M2 Group is a solid alternative to Telstra stock, offering exposure to the telecommunications industry, huge growth prospects and a 3.7% dividend (fully franked). Meanwhile, lower rates and lower petrol prices will help improve consumer spending considerably, which will bode extremely well for JB Hi-Fi. Combine that with a fully franked 5.6% dividend yield and you could have yourself a huge winner.
There is one more company which could be set for enormous returns in the event of a rate cut…
