Savers lose interest in latest cut The latest rate cut is forcing risk-averse savers and self-funded retirees to reconsider their options. MORTGAGE holders may be cheering the Reserve Bank of Australia's decision to lower the official cash rate to a record low of 2.75 per cent this week but for savers it's a cut that smarts. It's also not likely to be the end of the cutting cycle. Economists around the country are predicting lower rates given continued weakness in the economy. Some, such as Westpac, are even estimating the cash rate could be sitting at 2 per cent within the next 12-18 months. The latest cut is forcing risk-averse savers and self-funded retirees to reconsider their options. Although there is a significant amount of money currently in term deposits earning higher interest than can be achieved now, when they mature, savers will need to put their money elsewhere. The ultimate outcome will be money rushing into the stockmarket as savers and self-funded retirees look to equities to deliver yield. And although yields may not be as handsome now as they were some months ago, before the market really started to rally, they still easily trump the pittance that term deposits offer. The hunt for yield is the driving force behind the rising stockmarket and the reason it's now touching five-year highs. Since January, the stockmarket has climbed more than 10 per cent, and it's now more than 25 per cent higher than it was mid-2012. The average dividend yield in the stockmarket is about 4.2 per cent. Telstra and the banks have clearly been the front-runners, and at current prices still deliver yields of between 5 per cent and 5.5 per cent. That's before adding franking credits, which would bring yields to about 7 per cent. While there has been plenty of talk lately about the share prices of Australian banks and the perceived banking bubble, a number of Eureka Report contributors, including Ian Verrender and Adam Carr, have tabled sound arguments as to why this is not the case. Property trusts have also had a strong run as the market has risen, and estimates are that the average yield in the sector this year should be about 5 per cent. Term deposits meanwhile, deliver roughly 4 per cent. But if banks pass on some, or all, of the latest cut, this will drop closer to 3.75 per cent. The good news for savers contemplating a move into equities is that the continued hunt for yield and emphasis on income over growth stocks has provoked a sharp reaction from ASX-listed companies. Not wanting the banks and Telstra to hog the limelight, a growing number of companies are now making it their business to focus on income over growth to deliver yield as a means of attracting investors. Woodside Petroleum is one that has received much attention in the past few weeks as it moves to deliver yield over growth. In its latest trading update, the oil and gas player confirmed its intention to increase its target dividend payout ratio from 50 per cent to 80 per cent, and its plans to maintain the higher payout ratio for several years. The hunt for yield has been the central theme in the stockmarket for some time, and it's not likely to change any time soon. The income stream that yield stocks deliver will continue to lure investors into the market. And while savers and term deposit holders have had a rude awakening with the RBA's surprise decision to slash rates this week, there's no ignoring the obvious -- with rates looking likely to fall further, there are plenty of reasons not to pour money into term deposits. It's time to consider moving on. Cliona O'Dowd is chief reporter of Eureka Report. To read more by Cliona O'Dowd and other experts, visit www.eurekareport.com.au