Stocks look tempting as cash rate slides

SHAREMARKET yields are heading higher just as the official cash rate is expected to be cut below 4 per cent, enticing investors to shift assets from the safety of cash back into equities.

SHAREMARKET yields are heading higher just as the official cash rate is expected to be cut below 4 per cent, enticing investors to shift assets from the safety of cash back into equities.

The big four banks are expected to return between

7 and 8 per cent this year, fully franked, while Telstra's guaranteed dividend gives it a yield of 8.3 per cent at its current price of $3.36.

AustralianSuper's head of equities, Innes McKeand, said some shares were pushing 16 per cent, such as bread maker Goodman Fielder at a 15.5 per cent yield, though this was not all good news.

"If there is nearly 16 per cent in dividend yield available, with or without franking credits, that is an exceptionally attractive return," he told BusinessDay. "The market would say, 'If we believe in that we will buy the stock'.

"The fact that it has not done that suggests that maybe the market does not believe the dividend is actually sustainable."

Morning Star's head of equities, Andrew Doherty, said APN News and Media had a median yield forecast of 12.7 per cent, but was expected to cut dividends due to lower earnings.

Martin Lakos, a divisional director at Macquarie Wealth, said defensive stocks were usually the ones paying big dividends but market jitters over the European debt crisis had dragged down prices of some other sound companies, resulting in unusually high yields.

These high-yield shares were becoming more attractive despite the higher risk associated with equities. Although the Reserve Bank's cash rate was 4.25 per cent at present, Mr Lakos said he expected it to fall to 3.75 per cent this year.

"Investors will be saying, 'Is an 8 per cent yield from a bank or Telstra a big enough return to compensate for the risk in the sharemarket, compared with a 3.75 per cent yield [cash rate]?"' Mr Lakos said.

Telstra confirmed last year it would maintain its dividend until mid-2013 and is expected to announce a share buyback at its half-year results on February 9.

RBS analyst Alva DeVoy noted that corporate balance sheets were relatively under-levered, with high levels of cash and near-cash holdings.

"In our view, Ansell, Boart Longyear, Incitec Pivot, News Corporation and WorleyParsons have the potential to announce or increase buyback programs," she said in a note to clients.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles