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Stuck on 2.5% interest? Buy these 3 dividend stocks instead

woolworths share price
Credit: James Arboghast

The next screenshot from National Australia Bank Ltd (ASX: NAB) says it all…

NAB Term Deposit Interest Rates. Source: www.nab.com.au

NAB Term Deposit Interest Rates. Source: www.nab.com.au

…current returns on offer from term deposits are terrible.

But it’s not NAB’s fault. It’s no-ones fault.

The simple truth is official interest rates are down – for perhaps longer than most investors think – because the economy is going through a rough patch.

Currently stuck at 2.25% per annum, the Reserve Bank of Australia’s official cash rate is being tipped to fall further before it rises.

So if you thought NAB’s current 2.65% interest offering was bad, be prepared, it could get worse.

However, there is a silver lining: The stock market.

Lower rates are good for stocks for a number of reasons. But perhaps the most important reason is the dividends being offered.

Whilst it’s always important to be mindful of over-exposing your portfolio to higher-risk assets like stocks, many prominent Australian dividend-paying companies are forecast to provide yields more than double those of term deposits.

Many Australians perceive stocks to be akin to gambling. Yet over the long term that has been proven wrong.

In fact, the Australian stock market has achieved an average annual return of over 11% since January 1900.

3 dividend stocks to buy

Of course, stomaching volatility in share prices is easier said than done and one should never invest money they may need to call upon in the next five years.

It’s also important to remind ourselves to do our own research on companies before we buy and recognise that just because we can buy a stock doesn’t mean we should. Valuation is important.

However if you are – like me – sick of low interest rates, these next three stocks are worth a second look.

  1. Coca-Cola Amatil Ltd (ASX: CCL), Australia’s distributor of Coca-Cola and Beam-branded beverages is forecast to yield a grossed-up dividend of 5.44% in the next year.
  2. Woolworths Limited (ASX: WOW) needs no introduction. However as investors have become concerned over competition, its share price has fallen and its dividend yield has increased – it currently stands at 6.76% (grossed-up for franking).
  3. Challenger Ltd (ASX: CGF) is the largest provider of annuities (fixed income investments) to Australian retirees and stands with a number of ultra-promising long-term tailwinds (think baby boomers, growing superannuation pools etc.). It’s forecast to yield a grossed-up dividend of 4.98% in the year ahead.

Is Challenger a good ‘BUY’?

Challenger, along with Coca-Cola Amatil and Woolies, looks like a good buy for those focused on the long term. Whilst sharemarket crashes will come and go, each of these stocks have proven their ability to pay a rising stream of dividends and grow profits over many years.

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Returns As of 6th October 2020

Motley Fool contributor Owen Raskiewicz owns shares of Coca-Cola Amatil Limited and Woolworths Limited. He is also long June 2016 $5.197 warrants in Coca-Cola Amatil. Owen welcomes your feedback on Google plus (see below) or you can follow him on Twitter @ASXinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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