Joe Hockey’s budget HITS the tax breaks and HOPES like hell the RBA cuts interest rates

Buying shares just for the dividend yield, regardless of the underlying value and risks, is fraught with danger.

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Let’s be clear…

First and foremost, Joe Hockey’s federal budget was all about helping him and his buddy Tony Abbott keep their jobs.

As a secondary consideration, the budget might help the economy transition from mining to something other that digging dirt out of the ground and sending it to China, and might help you keep your job.

As to what that “other thing” might be, apart from building more houses, is anyone’s guess. Just don’t ask a politician. They are good at politics, useless at running an economy.

Make no bones about it. Last night’s budget was all about the politics. The only repairing going on was Hockey and Abbott’s political careers.

Forget the deficit and debt disaster. That’s pushed to the never-never.

Forget genuine reform. This government has zero political capital, and not much more credibility, to tackle the really big issues, like negative gearing, for example.

Instead, true to form for this lot of politicians, from both sides, this budget can be reduced to a three word slogan…

“Have a go.

That’s it. A hit and hope budget.

Hit the tax breaks for small businesses and hope like hell they spend their $20,000 AND in doing so, hope like hell these millions of small businesses create enough jobs to see us through this sticky patch.

Oh, and don’t forget Joe and Tony want you to vote for them at the next election.

The 2015 federal budget tinkered around the edges, a few winners here and a few losers there, but when you boil it all down, it was about attempting to instill confidence back into the economy… confidence Joe and Tony so utterly destroyed this time last year.

I predict the confidence will last until around the next mortgage repayment. Or the next credit card statement.

If you’re a small business, you might get a nice tax break on your brand new $50,000 pick-up truck, but once the new-car smell wears off, it’s back to the daily grind of finding enough work to pay the rent or pay off the unfeasibly large mortgage.

Still, the share market liked the budget. It doesn’t have an expensive mortgage to pay off.

In morning trade, the S&P/ASX 200 Index is back trading around 5,700, with retailers leading the way in anticipation of small businesses opening their wallets and purses and having a go. A not-as-bad-as-it-usually-is trading update from Myer Holdings Ltd (ASX: MYR) helped the sector too.

Or perhaps the share market’s bout of euphoria has less to do with Hockeynomics and more to do with the realisation that once again, after this hit and hope budget, it will be left to Glenn Stevens and the Reserve Bank of Australia (RBA) to do the economic heavy lifting, by cutting interest rates again.

Lower interest rates, by comparison, make shares look even more attractive, especially the dividend paying variety. Giddy up.

According to a Business Insider article, Capital Economics economists Paul Dale and Adam Collins released a note overnight saying Joe Hockey’s budget meant the Australian economy had been hung out to dry and the RBA will need to cut rates further as a result.

They believe the RBA will cut interest rates to 1.5% by the end of the year. They are also predicting an iron ore price of $US40 a tonne and the Aussie dollar at 70 cents.

C’mon Capital Economics. Have a go. Give us some cheer. Buy some happy gas. Spend up. HAVE A GO.

The same goes for you too, Credit Suisse, who are quoted in The Age as saying they believe the RBA needs to do more.

The same publication quotes Perpetual’s Matthew Sherwood as saying the government is “passing the ball to the RBA (again).”

Where there’s smoke, there’s fire. Joe’s budget has a problem.

No wonder then that Philip Baker, writing in The Australian Financial Review, said…

“The great hunt for yield, the investment strategy of the past few years, looks set to continue thanks to the budget. Interest rates are going to remain low, the tightening of the means test for pensioners and the prospect of a bank levy all point to investors looking at anything that will boost their incomes.

We know Australians LOVE a tax break.

Dividend investors, in the form of Australia’s somewhat unique dividend imputation system, otherwise known as franking credits, are staring one great big giant tax break in the face.

It’s called buying fully franked dividend shares.

For share market investors, it’s our equivalent of Joe Hockey’s $20,000 tax break to small businesses.

Only this tax break is not new. It has been around for years, and it’s not going away, certainly not on Have A Go Joe’s watch.

That said, not all dividend paying stocks are created equal.

Buying shares just for the dividend yield, regardless of the underlying value and risks, is fraught with danger.

People who bought Commonwealth Bank of Australia (ASX: CBA) shares when they were riding high at $96, or Australia and New Zealand Banking Group (ASX: ANZ) at $37 will know, to their cost. Both are down around 14% from their recent peak.

Believe it or not, there IS life for dividend investors outside the big four banks and other usual ASX 20 suspects.

Back in February this year I wrote that the next frontier for income-starved ASX investors is likely to be mid-cap ASX stocks.

Although at the smaller end of the scale, I highlighted fast-jewellery retailer Lovisa Holdings Ltd (ASX: LOV) as a company firmly on my radar.

At the time, with the shares around $2.40, Lovisa was trading on a forecast fully franked dividend yield of 4.7%.

Fast forward to today, and Lovisa shares are now trading at $3.15, up 31% in the last three months.

I hope you bought. I should have listened to my own advice and scooped up shares myself. I didn’t. Blame it firstly on inertia, secondly on greed. I was waiting for a lower entry price. It never came. My mistake.

Lovisa remains firmly on my watch list. Today, the shares trade on a forecast fully franked dividend yield of 3.5%. Not bad if you believe the RBA could cut the cash rate as low as 1.5% by the end of this year.

Three of the most dangerous words in investing are “I missed it.”

As I still consider whether to add Lovisa to my portfolio, even after its 31% run-up, I have those words firmly ringing in my head.

What I NEVER miss is Scott Phillips monthly list of 3 Best Buy Now Stocks, released exclusively to members of Motley Fool Share Advisor, our premium subscription-only stock picking service.

It should come as no surprise that the 3 Best Buy Now Stocks feature is the service’s most popular.

From the 23 companies Scott currently rates as a buy, he distills them down to just his favourite three stocks to buy now.

Last month, the list included a fast growing telecom stock, a financial services company uniquely positioned to benefit from the aging population, and Flight Centre Travel Group Ltd (ASX: FLT).

ALL were mid-cap stocks, ALL growth stocks, ALL paying nice fully franked dividend yields. None were the usual top ASX 20 suspects. The next frontier, in action…

ALL are beating the market over the last month, Flight Centre shares being up almost 10% versus the S&P/ASX 200 Index‘s fall of 4.5%. That’s some out-performance.

As for which companies make the cut this time around, all will be revealed tomorrow afternoon (Thursday), after the market close, exclusively to Motley Fool Share Advisor subscribers.

If you’d like to give Motley Fool Share Advisor a try, a TWO year subscription costs just $299, a full 60% off. Click here now to Have A Go.

It will help you invest better. It will help The Motley Fool create more jobs (we’re hiring now), helping the economy. It will help Joe Hockey keep his job. It might even make you better looking. The subscription is also likely tax deductible. C’mon readers… have a go.

My guess is most people reading this were were NOT beneficiaries of Joe Hockey’s 2015 budget measures. For most of us, nothing changes. When it comes to franking credits, no change is a good thing.

One other thing that doesn’t change is low interest rates. They are here now, and here to stay. Investors still need to look at “anything that will boost their incomes.”

For me, hands down, that means buying dividend paying stocks… before the RBA potentially cuts interest rates to 1.5%.

Wondering where you should invest $1,000 right now?

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Of the companies mentioned above, Bruce Jackson has an interest in CBA, ANZ and Flight Centre. 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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