It will come as no surprise to… anyone really, when I say interest rates are at record lows. The Reserve Bank of Australia (RBA) lowered interest rates 3 times last year and the official cash rate now sits at an unprecedented 0.75%.
Anyone who has (or had) a significant amount of capital invested in savings accounts or term deposits would have noticed that the rates they now receive from the bank in exchange for holding their cash are becoming laughable.
Check out some of the current term deposit offerings from Westpac Banking Corp (ASX: WBC) below for some context.
Source: westpac.com.au
I'm not picking on Westpac here – all the banks offer similar rates these days. Those kinds of returns don't even really cover inflation, and so are losing their use as real 'investments'.
But here's where things really get interesting. As interest rates were lowered last year, most ASX shares saw an uptick of interest. Accompanied by a rising stock market in 2019, a majority of ASX dividend-paying share saw very solid gains last year – almost in tandem with the falling cash rate.
But not all these gains were equal.
Take a look at the Transurban Group (ASX: TCL) share price over the past 3 years.
Transurban Group Chart and Price Data 2017–2020
The red line (inserted by yours truly) represents the time (October 2018) that the markets began pricing in the first interest rate cut of 2019. Between then and now, TCL shares have gained around 35%. That's a fairly large move for a blue-chip stock that certainly hasn't grown earnings by anywhere close to 35% in that time.
My guess is that because Transurban is a toll-road operator, its dividend is viewed as one of the 'safest' on the ASX and the best replacement for the newly impotent cash sitting in term deposits.
We can see a similar story in the Sydney Airport Holdings Pty Ltd (ASX: SYD) share price below:
Sydney Airport Chart and Price Data 2017–2020
Today, Transurban trades at around 60 times earnings (adjusted) with a 3.98% dividend yield, whilst Sydney Airport trades at around 50 times earnings with a 4.45% dividend yield.
Right now, the average for the S&P/ASX 200 (INDEXASX: XJO) is around 18.
For an ASX bank (also favourites of income investors) – you're looking at multiples of 14.28 for National Australia Bank Ltd (ASX: NAB) and 11.69 for Australia and New Zealand Banking Group (ASX: ANZ).
Foolish Takeaway
These numbers tell us how much of a premium the market is putting on 'safe' dividends these days. Both Transurban and Sydney airport are quasi-monopolies that investors regard as having defensive earnings bases and therefore 'safer' dividends (unlike the banks). Whether you want to pay a premium for such perceived safety is up to you!
