Retirees should review their income-generating strategies in light of the Reserve Bank of Australia’s (RBA) second rate cut as it could mean they receive less income from their income investment assets.
While the rate cut was good for homeowners, it would have a negative impact on those who rely on their investments for income.
This week’s cut brought rates to historic low of one per cent and 10-year bond yields had dipped below 1.4 per cent.
Don Hamson, managing director of Plato Investment Management, said: “Returns on cash, term deposits and products linked to bank bill rates will likely continue to fall under that scenario. Many income-related products, like income securities or bank hybrids are priced at a margin to bank bill rates, and we have already seen 90-day bank bill rates fall almost 1 per cent, which is already crimping their income.”
He said investors needed to be sure they were invested in a variety of income-generating investments to take advantage of dividend increases across the various sectors, not just in Telstra and the big four banks.
“Dividend increases, for example, have been largely concentrated in the resources sector, with traditional income stocks like the big four banks and Telstra either maintaining or cutting dividends.
“A cut in interest rates - while it won’t lead to an increase in dividend income - will also lead to increased investor demand for dividend paying stocks, raising the capital value of some.”