TPG Telecom Ltd and Blackmores Limited: 2 stocks for your future income needs 

Credit: Benny

It’s official.

On the first Tuesday of May 2016, the Reserve Bank of Australia (RBA) cut the cash rate yet again, this time to 1.75%.

In fact, this is the 11th interest rate cut in a row since the RBA commenced decreasing official interest rates back in November 2011 (when they were 4.50%), and investors in term deposits have seen their household incomes fall dramatically since then.

By way of example, $1 million dollars invested in a term deposit with the Commonwealth Bank (CBA) is currently paying 2.45% over 12 months, and that’s before the impact of the latest RBA cut.

Assuming the CBA cuts its term deposits rate by the full 0.25%, your $1 million dollar nest egg (if you’re fortunate enough to have one) will soon be paying you $22,000 per annum, or the equivalent of $433 per week.

According to the Melbourne Institute of Applied Economic and Social Research, the poverty-line for couples where neither partner is working is $597.84 per week.

So, $1 million bucks isn’t what it used to be, and you’re either going to have to go back to work and save more, or earn a higher return on your investments.

I know what you’re going to say.

“Fine, there are plenty of high-yielding stocks on the ASX and we’ll invest in those for our income needs”.

Easy, sure, but it’s not that simple.

You also need to consider your chosen stock’s overall business quality and value which, I think, is not always considered rationally. Take examples like Telstra Corporation Ltd (ASX: TLS) and National Australia Bank Ltd (ASX: NAB).

The results of a yield-chasing buying strategy since 1 July 2015 are shown below:

Stock Purchase price ($) Yield (%)* TSR**(%)
ASX: TLS 6.15 4.87 (8.20)
ASX: NAB 32.29 6.13 (1.23)

* Excluding franking credits

** Total Shareholder Returns

In this example, good upfront yields which massively beat term deposit rates are offset by paying for shares in businesses that face a number of economic, competitive and growth-related challenges. There’s no point in receiving fat dividends if your overall TSR is negative, which is hardly beneficial to your ongoing living-well-in-retirement strategy.

Now that interest rates have been reduced again, the temptation is definitely going to be to just ‘buy the banks’, or ‘buy Telstra’ for perceived safety, but I think it’s more important than ever now for investors to actually ignore today’s yield, consider the business’s prospects and think about your future income needs.

This will take time and patience though, but you may well experience an overall better investment outcome.

To look for good income prospects outside of the S&P/ASX 50 (INDEXASX: XFL), you may wish to consider Blackmores Limited  (ASX: BKL) and TPG Telecom Ltd (ASX: TPM), despite their miniscule yields today.

Sure, both companies have provided a life-changing return for investors over the last 3, 5 and 10 years, but this doesn’t mean their growth prospects today are any less stellar. Blackmores and TPG are forecast to grow their dividends by 58.6% and 19.6% respectively over the next two years.

Foolish takeaway

Now, more than ever, you need to avoid a knee-jerk reaction to plummeting interest rates. Don’t just look to high yields, and do conduct some due diligence on your company-of-choice.

The key is to start early and be patient. Incongruously, lower yields in growing businesses with low pay-out ratios today may well turn out to be your most reliable income-paying stocks in retirement.

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. 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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