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With interest rates near zero these ASX income shares are in focus

The RBA’s decision to cut the official cash rate to a razor thin 0.1% puts ASX dividend paying shares in the spotlight.
The post With interest rates near zero these ASX income shares are in focus appeared first on Motley Fool Australia. –

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There were three big events I, and most Aussies, had a close eye on yesterday.

We’re still awaiting the definitive outcome of the United States elections. Both the White House and the Senate can potentially go to Joe Biden and the Democrats, or Donald Trump and the Republicans.

We do know that Twilight Payment, ridden by Jye McNeil, took first place at the Melbourne Cup.

And, of far more significance to Australia’s savers, we know that the Reserve Bank of Australia (RBA) cut the official cash rate, as was widely expected. The cash rate was dropped from the already historic low 0.25% to a new razor thin 0.10%

Debtors, rejoice.

Savers, not so much.

The RBA also announced an unprecedented (for Australia) level of new quantitative easing (QE). The RBA will now buy $100 billion of government bonds over the next 6 months, vowing “to do more if necessary”.

So when can Australia’s savers, reliant on the income of their term deposits to keep ahead of the bills, expect to see interest rates head comfortably higher?

Don’t hold your breath.

The central bank stated the cash rate won’t go up until inflation “is sustainably within the 2 to 3 per cent target range”.

And how long, pray tell, is that?

According to the RBA, “Given the outlook, the Board is not expecting to increase the cash rate for at least three years.”

RBA governor acknowledges low deposit rate “difficulties”

Even with inflation running below 2%, the returns from term deposits are effectively negative. Meaning each year, after you add in the dwindling interest earned on your cash deposit, your savings are worth less than you started with.

Conundrum?

You bet.

And one that RBA Governor Philip Lowe openly acknowledged, saying:

The Board recognises that low rates can encourage some additional risk-taking as investors search for yield. It also recognises that low deposit rates can create difficulties for some people. These issues will need to be closely watched over the months ahead. But the Board judged that the bigger risk at the moment was the threat to our economy and to balance sheets from an extended period of high unemployment. Today’s decision will lessen that risk.

What’s a diligent saver to do?

With negligible to negative real returns on term deposits, the spotlight is on the income potential of ASX dividend shares. These are companies that pay out (regularly, you hope) some of their profits to shareholders.

You also hope that the share price of these ASX dividend shares goes up in time, as any capital losses can offset the dividend payments, potentially leaving you worse off.

Which is why the RBA acknowledged that searching for yield does involve “some additional risk-taking”.

That’s because term deposits – especially with banks covered by the Australian government’s deposit guarantee – are, well, as safe as money in the bank. Which is not 100% safe, mind you. But about as close as you can get.

2 stand-out ASX dividend shares to consider

With that said let’s look at 2 high-performing income shares, both of which are part of the S&P/ASX 200 Index (ASX: XJO).

First up is Sonic Healthcare Limited (ASX: SHL), the world’s third largest pathology medicine company with operations in 8 countries. Sonic pays a 2.4% trailing dividend yield, 26% franked.

It also has a lengthy proven track record of increasing share prices, dating back to 1999. Not that there weren’t some down periods in that time. But the trend has been steadily higher, with Sonic’s share price up 1,204% since January 1999.

The Motley Fool’s own Edward Vesely first recommended Sonic in his investment advisory, Dividend Investor, on 16 July 2019. He noted the company’s solid cash flows and defensive earnings, its growth opportunities in highly fragmented overseas markets, and a consistent and growing dividend as reasons to buy.

On 20 October, Edward wrote that Sonic, “has seen revenue surge to start the new financial year. So far the company has conducted more than 9 million Covid-19 tests globally”, while adding the caveat that, “this level of growth will not continue indefinitely.”

Atop the dividend payments, Sonic’s share price is up 33% since Edward first tipped the stock to his members. Over that same time the ASX 200 is down 10%.

The second ASX dividend paying share in the spotlight today is Amcor CDI (ASX: AMC). Amcor was also recommended by Edward in Dividend Investor. He tipped the global packaging company on 19 November 2019.

Edward cited the anticipated benefits from Amcor’s merger with Bemis, its shareholder-friendly management, and 4.6% trailing dividend yield (unfranked) as reasons to buy.

Atop the regular dividends, Amcor’s share price is up 9.4% since 19 November last year, while the ASX 200 is down 11.9%.

At the current share price, both Sonic Healthcare and Amcor retain a buy rating over at Dividend Investor.

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Returns As of 6th October 2020

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Amcor Limited. The Motley Fool Australia has recommended Sonic Healthcare 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.

The post With interest rates near zero these ASX income shares are in focus appeared first on Motley Fool Australia.

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