As expected the Reserve Bank of Australia moved to cut Australia’s official benchmark lending rates to just 1.25% today in a move that could have multiple consequences for the wider economy and local share market.
One group of people unhappy at the move are savers who keep their cash at the bank in the form of risk free term deposits and the like.
Today for example the Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) offer a two-year term deposit rate of just 2.6%, while National Australia Bank Ltd (ASX: NAB) will pay just 2.05% on a shorter 8-month term deposit.
In other words once you offset inflation of around 1.8% the value of your savings is nearly going backwards if you just leave them at the bank.
The kicker is that the RBA could reportedly deliver another 2 or 3 cuts over 2019, which means you may as well stick your cash under the bed, rather than keep it at the bank.
Even other income related products such as money market instruments, annuities, or bank hybrid issues for savers are priced a fixed margin above the bank bill swap rate (BBSW), which will also generally fall in line with the central bank’s lending rate.
Therefore I reckon the best way to beat the pathetic (insulting) returns now available on cash is to look for big dividend paying shares on reasonable valuations.
And I’m talking the kind of shares that pay big dividends today, not in 3 years’ time.
Admittedly this is no easy task, but below are three companies I’d happily buy today.
Accent Group Ltd (ASX: AX1) is the footwear retailer that has fallen to $1.40 today largely on the back of some recent insider share selling that admittedly is a concern. However, I’d be prepared to give this retailer with an excellent long-term track the benefit of the doubt as to its performance with it guiding for another strong year of profit growth in FY 2019. It recently lifted its dividend 50% and based on trailing 12 month dividends of 8.25 cents per share it offers a trailing yield of 5.9% plus full franking credits. Best of all is the potential for a dividend hike in August that could take that yield even higher, with the stock also trading on a relatively low price-to-earnings multiple.
Dicker Data Ltd (ASX: DDR) is another business I’ve recommended many times over the years not least because it pays big quarterly dividends and trades on a reasonable valuation given it’s producing consistent double digit profit growth. If we assume it will pay 22 cents per share in dividends over the next 12 months it offers a 4.6% yield plus full franking credits based on a share price of $4.82.
Magellan Financial Group Ltd (ASX: MFG) is an international equities manager that often invests in blue-chip tech and has a strong track record of revenue, profit, and dividend growth. Analysts peg it as paying $1.72 in total dividends over FY 2019 (dividends can vary a fair bit depending on performance fees) to place it on a fully franked yield of 4% based on today’s share price of $41.98. I wouldn’t pay more than that for the group today, but including the dividends it could easily deliver a double digit return in the 12 months ahead.
Please note all of the above businesses come with considerable risks and as such should only be bought as part of a balanced investment portfolio. For what it’s worth, I especially like the look of Accent Group at $1.40 and if I weren’t blocked from trading it due to writing about it I’d be a happy buyer at that price.
As an alternative you could consider either of these two tech shares.
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You can find Tom on Twitter @tommyr345
The Motley Fool Australia owns shares of and has recommended Dicker Data Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. The Motley Fool Australia has recommended Accent Group. 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 Scott Phillips.