Since interest rates experienced a brief rise from 2009 until 2011 during which time they rose to 4.75%, they have gradually fallen back to just 2%. And, while they have been at that level for five months, the outlook for the commodities market and for the wider Australian economy means that further falls seem likely.
On the one hand, this is good news. It means that businesses and individuals with debts are likely to see the cost to service their borrowings fall, which may improve the outlook for the wider economy. Furthermore, consumer spending may be given a boost and, while imports are likely to become more expensive due to a weaker Aussie dollar, export companies are also likely to benefit from improved competitiveness.
However, for savers low interest rates are bad news. And, with inflation likely to be given a nudge upwards by a looser monetary policy, the real returns on cash balances may continue to be squeezed. As such, dividend-paying stocks could be a sound answer for long-term investors.
For example, National Australia Bank Ltd. (ASX: NAB) currently yields a whopping 6.3% (fully franked) and, with dividends per share set to rise by 0.9% per annum during the next two years, it is due to offer a 13.1% income return over the next two years.
Encouragingly, NAB is forecast to increase its bottom line at an annualised rate of 11.5% during the next two years and this means that its dividends are forecast to be covered 1.3 times by profit next year, which indicates that they are highly sustainable. And, with NAB deciding to sell-off international operations, it should be able to focus more capital and energy on its domestic operations, where it is making prudent changes to its business so as to develop increased customer loyalty.
The sale of non-core assets also means that NAB's risk profile is arguably more appealing, since its UK operations in particular have been highly problematic in recent years, which is at least partly due to the high regulatory burden via challenges such as payment protection insurance (PPI) claims. And, with NAB trading on a price to earnings (P/E) ratio of 12.9 versus 15.5 for the ASX, there is upward rerating potential alongside a high income return, too.
Similarly, Goodman Group (ASX: GMG) is also making changes to its business model, with the property company investing in its development pipeline so as to take advantage of favourable market conditions. Through this, Goodman is selling off a number of its assets and reinvesting that capital in potentially higher grade assets which, in the long run, offer improved cash flow and capital gain potential. For example, in the US alone Goodman has a $2bn development pipeline across 12 different sites.
This growth potential should allow Goodman to grow its dividends by more than inflation over the long run and, looking at the next two years, the company is forecast to grow shareholder payouts by 5.4% per annum. This means it has a forward yield of 4.3% and, with dividends being covered 1.7 times by profit, they appear to be highly sustainable, too.
