Fully franked dividend yields most attractive in 15 years

Chill out.

That’s the message to economists from Reserve Bank of Australia boss Glenn Stevens.

You can stop the guessing now — interest rates will NOT be cut in December.

Like the rest of the country, the RBA is taking January off.

Which takes us to February next year… a lifetime away for economists who make their living trying to second guess the RBA.

Those poor economists. What are they going to do for the next few months? Hit the beach? Grab a 6-pack and watch the upcoming historic day-night cricket test match? Do a bit of Christmas shopping?

Probably not. Economists are paid to make predictions. And predicting they will go… now firmly focusing on 2016.

Right on cue, as reported today in the AFR, the boffins at ANZ are already predicting the RBA will likely cut the cash rate in February.

At this stage in the cycle, a cash rate of 2% or 1.75% or even 1.5% is neither here nor there in the whole scheme of things.

Here’s ALL you need to know about interest rates…

Interest rates are low, and they are staying low, for the foreseeable future.

Australians are in debt up to their eyeballs. They are struggling to service their massive mortgages… even with interest rates at historically low levels.

Population growth is slowing. Wage growth is at a record low. Unemployment is relatively high. Inflation is low.

With the median Sydney house price cracking $1 million, imagine for a moment how your average mortgage holder would fare if their repayments were 50% higher than today?

Under that scenario, not only would the house price bubble well and truly burst, but Australia would crash into a deep recession.

It’s not going to happen… not on Glenn Stevens watch, if he can help it.

And help it he most certainly can… by keeping interest rates at or near these historically low levels for years and years to come.

He said as much yesterday, predicting global interest rates would remain “very low” for most of the decade.

When it comes straight from the horse’s mouth, you better believe it.

Mr Stevens also warned older shareholders to curb their expectations of ever-rising dividends.

Low growth combined with high payout ratios will have that effect. Big four bank shareholders take note.

Not that a 6% fully franked dividend yield on Westpac Banking Corp (ASX: WBC) shares should be sneezed at… not in this low interest rate environment.

Grossed up for franking credits, it’s the equivalent of an 8.5% yield. It certainly beats the pants off the returns from term deposits.

No wonder many Australians, particularly those approaching, or in retirement, have been embracing the yield trade. When compared to the alternatives, shares look to be a no-brainer.

Consider this chart from AMP’s Shane Oliver…

TS 25 Nov - 1

For income-hungry investors, did I say shares were a no-brainer?
The trade-off is you need to accept a level of volatility. Unlike term deposits, underlying share prices rise and fall on a daily basis. There’s no such thing as a free lunch.

When thinking about volatility, most people worry about a share market crash. They fear another GFC.

Even a plain vanilla share market correction — when the market falls 10% or more — can send them into a spin.

I’ve got news for you. On average, share market corrections happen every year.

Rather than being scared out of your wits when markets correct, embrace the lower share prices on offer and pick yourself up a bargain or three… as I did a couple of weeks ago when the S&P/ASX 200 Index dipped back to the 5,000 level.

So far so good, especially for my freshly minted Mobile Embrace Ltd (ASX: MBE) shares, a buy recommendation from our Motley Fool Hidden Gems small-cap advisory service. In less than two weeks, I’m up a whopping 37%.

Even after the market’s bounce off its recent bottom, we’re still in the middle of a correction now — the S&P/ASX 200 Index is down almost 13% from its April high, lead by the 40% plunge in the BHP Billiton (ASX: BHP) share price.

I own BHP. It’s been a brutal and bruising fall from grace. I’ve made many mistakes along the way, including buying more BHP shares when they fell below $30. Talk about setting money on fire.

Such is the life of a share market investor. Ups and downs. Winners and losers.

For me, it’s all part of the fun, all part of the challenge. Some days you win. Some you lose. Some years you win. Some you lose. Most 5 year periods you win. Almost every decade you win.

2015 has been a tough old year for many “traditional” blue chip investors.

Shares in the big four banks are down in 2015.

Shares in the big two supermarkets are down in 2015.

Shares in the big two miners are down in 2015.

Shares in oil and gas companies have absolutely been taken to the cleaners, lead lower by the 50% falls in the Santos Limited (ASX: STO) share price and the Origin Energy Ltd (ASX: ORG) share price in 2015.

Human nature being what it is, we look backwards at what has recently happened in the share market and presume that state of affairs will go on well into the future.

It’s akin to driving by looking in the rear view mirror. It’s an accident waiting to happen.

Fix your eyes firmly ahead, Foolish reader.

Fix them to Glenn Stevens’ words that global interest rates will remain very low for the rest of this decade.

Fix them back onto the chart above — relative to term deposits, apart from the madness of the GFC, the dividend yields on shares are about as attractive as they’ve been in the past 15 years.

Such distortions generally don’t last for long.

In this case, either dividends are cut, interest rates rise, or dividend yields fall as share prices rise.

We can confidently count out higher interest rates.

Some companies will cut their dividend, likely lead by BHP Billiton. But the vast majority of ASX companies will at least hold, and likely increase their dividends.

Which leaves the most likely outcome being dividend yields falling as share prices rise into 2016.

No wonder therefore that a group of Australia’s leading economists yesterday said they expected the ASX 200 Index to have climbed nearly 11% by the end of 2016.

In this low interest rate environment, you’d bite your own hand off for that sort of capital growth.

Add in fully franked dividend yields of around 5%, and 2016 could be a year for share market investors to savour.

Meaning NOW could be the perfect time to get in ahead of the masses…

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Of the companies mentioned above, Bruce Jackson has an interest in ANZ, Westpac, BHP Billiton and Mobile Embrace.

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