Retirees and investors need to reassess their income generating investments in light of the Reserve Bank of Australia’s (RBA’s) rate cut on Tuesday to 0.75%, Plato Investment Management believes.
The fund manager said interest rates even before the rate cut had already fallen as one-year term deposit rates had fallen 70 basis points to 1.45% at the end of August.
Plato managing director, Don Hamson, 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 more than 1% this year, which is already crimping their income.
“Mortgage holders will benefit from this rate cut, although I don’t expect banks to fully pass on all of the cut. On the other hand retirees living off cash-linked income are already struggling to make ends meet, and this cut will further crimp their income.”
However, Hamson noted that dividends paid by Australian companies had never been stronger with an increase on average of 9% compared to last year’s increase of 3%.
He said retirees, in particular, needed to ensure they were invested in the best possible income-generating equities, not the just the Big Four and Telstra.
“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,” he said.
“A cut in interest rates – while it won’t lead to an increase in dividend income - may lead to increased investor demand for dividend paying stocks, potentially raising the capital values of some.”
Hamson added that falling interest rate expectations had been the major driver of higher share prices in 2019.