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Why ASX dividend shares are the best investment for a low-rate world

The Reserve Bank of Australia (RBA) has slashed interest rates 3 times this year and we now depart 2019 with a cash rate of just 0.75% – the lowest level in history. There was a time when interest rate cuts were greeted with jubilation – who doesn’t love a mortgage payment reduction, right?

But I fear these days are long past. With savings accounts and term deposits offering negligible returns these days, any further cuts will put enormous pressure on conservative investors and savers alike. Commonwealth Bank of Australia (ASX: CBA) and the other banks are also struggling to pass on the full rate cuts at these levels anyway, blunting any positive gains that future cuts might offer.

So for anyone who wants to actually invest for real returns and cash flow today, there are far fewer options than there once was. Government bonds are yielding rates lower than your average savings account, and even with a term deposit, you are barely breaking even once inflation is considered.

Property has always been Aussies’ favourite investing playground. But property prices have been on the rise again lately as well – this impacts the kind of rental yield you can expect, especially in our capital cities.

In fact, I think most property investors would struggle to find a major capital city property that offers a rental yield above 4% these days. Negative gearing and other property tax concessions actively encourages investment in property for capital gain rather than cash flow. This further reduces the availability of positively geared properties available.

Enter dividend shares

That’s why I think franked ASX dividend shares are the only real way to achieve substantial cash flow on your capital for the average investor. I know the banks aren’t too popular at the moment, but CommBank shares are today offering a starting yield of 5.44% on current prices (which grosses-up to 7.77% with franking) – a very attractive income stock in my view.

Similarly, BHP Group Ltd (ASX: BHP) has returned mountains of cash to its investors this year, as has Fortescue Metals Group Limited (ASX: FMG).

Even retail stocks like JB Hi-Fi Limited (ASX: JBH) and Premier Investments Ltd (ASX: PMV) offer grossed-up yields over 5%.

You could even go further with an income-focused listed investment company like WAM Research Ltd (ASX: WAX), which offers a whopping starting yield today of 6.6% (9.43% grossed-up).

Foolish takeaway

In this era of record low rates, I think a well-diversified ASX dividend share portfolio is your best bet in offering a decent return on capital. Picking the right shares is essential though, so make sure you’ve done your research!

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments 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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