This afternoon the Reserve Bank decided against cutting the cash rate further and kept it on hold at 0.25%.

While this was a small win for income investors, it certainly doesn’t make life any easier for them.

At present Commonwealth Bank of Australia (ASX: CBA) offers interest rates of 1% per annum on a five-year term deposit. This is broadly in line with what you can find elsewhere with the other big four banks.

This kind of yield makes it very hard for investors to earn a sufficient income from term deposits.

But never fear, because the Australian share market is home to a large number of dividend shares which offer vastly superior yields.

Two which you can use to beat low interest rates are listed below:

Rural Funds Group (ASX: RFF)

The first dividend share to consider buying is this property company. Rural Funds is different to most property companies on the ASX. It has a focus on Australian agricultural assets and owns a diverse portfolio of high quality properties across different industries. These properties have ultra long leases and come with fixed rent increases built into them. This provides Rural Funds with a lot of earnings visibility. As a result, it has been able to provide distribution guidance for FY 2020 and FY 2021. The company plans to pay shareholders a distribution of 10.85 cents per share this year and then 11.28 cents per share next year. The latter equates to a 5.6% distribution yield.

Telstra Corporation Ltd (ASX: TLS)

Another dividend share to buy is Telstra. I think the telco giant is a great option for income investors due to its defensive qualities. These have been on display during the pandemic, with Telstra able to reaffirm its guidance for FY 2020 despite the crisis. In addition to this, with the NBN headwinds beginning to ease, I believe a return to growth is not too far away. In the meantime, I’m confident that its free cash flows are sufficient to maintain its 16 cents per share dividend. This equates to a fully franked 5% dividend yield.

More reading

• How to value the big four ASX banks
• Why I would buy these ASX 200 blue chip shares in June
• 5 winning ASX dividend shares to buy in June
• How bankable are the big four ASX bank shares in 2020?
• This ASX fintech share is up 489% since March

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended RURALFUNDS STAPLED and Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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Interest rates on hold!

Today, the Reserve Bank of Australia (RBA) kept the cash rate steady at its record low of 0.25%. The RBA normally meets on the first Tuesday of every month to decide the direction of the nation’s monetary policy. It can technically either raise, lower or hold interest rates steady. But everyone knew the only real choice of today’s meeting would be whether to cut to zero or not.

So even though interest rates are still not quite at their absolute limit, in my view it doesn’t really make much difference at the end of the day if the cash rate is at 0.25% or zero.  

RBA governor Philip Lowe also flagged that rates will be at record lows for some time, stating, “the Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band”.

So if low rates are indeed here to stay, here are 3 consequences I see happening for ASX investors.

Low interest rates means cash is no longer king

Cash will continue to be a lousy asset to hold over the long-term. That’s because the interest rates that you can expect to receive on cash investments like term deposits and savings accounts won’t meaningfully rise unless the RBA lifts interest rates. Thus, we can expect cash to continue to generate very little real return when considering the effects of inflation.

ASX 200 share prices will rise

Low interest rates have an indirect effect on the value of ASX shares. That’s because most valuation models use the ‘risk-free return’ of government bonds to figure out how much a share is worth. If interest rates remain low, so will the yield of government bonds.

Therefore, I expect the value of the S&P/ASX 200 Index (ASX: XJO) to be higher over the medium to long-term than they otherwise would be if interest rates were at more ‘normal’ levels (although it looks as though this is the new ‘normal’).

Expect more volatility

As a consequence of the first 2 impacts, I expect volatility to continue to be a feature of the share market while interest rates remain so low.

The fact that there are now very few avenues to building wealth outside the share market means that there will be more capital sloshing around. You will have investors who don’t really want to be in ASX shares but simply have no alternative.

As such, I expect higher loss aversion behaviours to be in play. There are going to be a lot of investors who don’t want to lose capital and are therefore more likely to sell their investments during natural downturns or corrections in the market.

In my opinion, all of this points to an increased level of volatility in shares going forward – as if we haven’t had enough of that this year already!

More reading

• 3 things ASX investors need to know about the RBA’s rate decision today
• These ASX shares were among the best performers in May, surpassing the ASX 200
• Could Goldman Sachs’ 2020 predictions for the US share market spell the end of the ASX 200s remarkable rise?
• The 3 ASX tech stocks that helped this fund manager outperform in May
• Is the a2 Milk share price too high to buy?

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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