The RBA dropped the official cash rate by 25 basis points to 3% in December, which now is at its lowest level since the GFC (and down from 4.75% since October 2011). So what does this mean?
While this signals some pressure in our domestic economic conditions and continued volatility in global markets, the RBA stated the full (positive) effects of earlier measures are yet to be observed. We continue to see the ‘yield theme’ as remaining highly relevant to investors into 2013 as domestic interest rates continue to move lower and investors seek a higher, but reliable, return than cash investments; our Australian dividend yields continue to be attractive from a global investment perspective; and a lower economic growth environment lends itself to yield being a pivotal part of overall investment returns. Until there is confidence in real economic growth, yield looks likely to remain king. We continue to highlight a number of opportunities to invest in solid, reliable yield stocks, including:
Banks: National Australia Bank yielding 6.6% fully franked
All of our major banks continue to pay solid dividend yields. Our preferred pick remains NAB, which has the highest yield in the sector. While the UK business will remain a drag on earnings and returns for sometime yet, we continue to expect that NAB will deliver a superior return on equity trajectory versus its peers over the next three years, which in turn will close the bank’s current PE discount to the sector.
Utilities/Infrastructure/AREITs: going ex-dividend in December
Our key pick in the Utilities sector is APA Group (yielding 6.2%), and Cromwell Property Group (yielding 8.1%) in the AREIT sector.
Mid-cap stocks: opportunities exist for reliable and growing yield
While we have maintained a focus on the larger cap end of the market for our yield picks, many of our small and mid-cap stocks have proven to be good quality businesses and offer solid yields. Some offer defensive earnings, while others have proven themselves to be quality managers through various cycles. Ardent Leisure (yielding 8.0%) is amongst these.
This article does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever.