It’s time for older Australians to review their investment strategies after the Reserve Bank of Australia (RBA) rate cut this week, says Australian funds manager Plato Investment Management.
The rate cut will help homebuyers, but will work against retirees who rely on returns from investment assets.
Cash rates and 10-year government bond yields were already at all-time lows before the cut and economists are predicting two or more cuts over the next year, which could scarcely be worse news for retirees.
“Returns on cash, term deposits and products linked to bank bill rates will likely continue to fall under that scenario,” said Plato’s managing director Don Hamson. “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 60 basis points this year, which is already crimping their income.
“Retirees living off cash-linked income will struggle to make ends meet. So, it is very timely for retirees to reconsider their income-generating asset mix. Thankfully, given the somewhat surprising election result, retirees can continue to bank on receiving franking credits from Australian share investments.”
Dr Hamson added that even though interest rates were lower than ever, dividends paid by Australian companies had never been stronger.
“Ironically, the ALP threat to franking has actually caused some companies to flush out excess franking credits prior to the end of this financial year, providing Australian income investors – including retirees – with a record level of dividends,” he said.
“However, not all investors and retirees have benefitted from this dividend bonanza. Many, retirees, in particular, need to reassess their income-generating investments to ensure they are invested in the best possible income-generating equities, not just the big four banks 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.
“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.”
Read more at www.sharecafe.com.au
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