As you've probably heard, the Reserve Bank of Australia (RBA) decided to cut interest rates this week. The 25-basis point cut to the cash rate was widely expected, but still welcomed by many investors and mortgagees. But falling interest rates aren't good news for everyone. Many retirees and income investors might be lamenting the reduction in interest from term deposits, savings accounts, and government bonds that a rate cut heralds.
Yep, this week, government bond rates and interest rates on cash investments would have dropped, if they hadn't already. Coupled with February's rate cut, this means that cash investors would have likely seen a 0.5% reduction on the interest they can expect from a cash investment since January.
Most commentators are expecting several more rate cuts this year, too.
With that in mind, retirees and other income investors might be better off moving some capital from cash investments to ASX dividend shares. Dividend shares do not offer the capital protection that a cash investment does, of course. But with rates falling, they do offer the potential for far higher returns on an investment going forward. Not to mention a more favourable tax treatment, courtesy of franking credits.
With that in mind, let's discuss two ASX income shares that I would happily replace a term deposit or other cash investment with today.
First up is ASX 200 telco Telstra. Telstra has long been famous as an ASX income share, with a habit of funding fat, fully franked dividends. The telco's ongoing market dominance and inelastic earnings base mean it can fund dividends with little regard to the ups and downs of the business cycle – it was one of the few ASX 200 shares that maintained its annual payouts over COVID-ravaged 2020 and 2021.
More recently, Telstra has been increasing the income it pays to investors, upping its March interim dividend this year from 9 cents to 9.5 cents per share, fully franked.
At current pricing, Telstra shares are trading on a dividend yield of 3.9%, or 5.57% grossed up with those full franking credits.
Next, let's talk Coles, which offers income investors many of the same attributes that Telstra shares do. This is a consumer staples business that tends to do well regardless of the economic weather. After all, we all have to regularly eat, drink, and stock our households with the basics.
Pleasantly, Coles has shown it is capable of expanding its market share in recent quarters. The company is also one of the ASX 200's most consistent dividend payers, having increased its annual dividend every year since it was first listed back in late 2018.
Today, Coles shares are trading on a dividend yield of 3.18%, or 4.54% grossed up with full franking.
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