There was much relief in the air after the Reserve Bank of Australia (RBA) cut interest rates by 25 basis points this week.
It was the third time the RBA had cut rates in 2025 so far, leaving the cash rate at 3.6% today.
Whilst much of the focus of interest rate reductions is on the relief that they bring for mortgage holders, there are other flow-on effects that aren't as rosy.
One of the most prominent of those is the interest rates that Australians can enjoy on 'safe cash' investments. Here in Australia, our money is safe in the bank up to deposits of $250,000, thanks to a federal government guarantee.
That makes savings accounts and term deposits offered by Australian financial institutions very attractive if interest rates are high. After all, with no risk of losing one's capital, why not leave it in the bank if you can get a 4% or even a 5% return on your money every year.
For the past two or so years, that was indeed the case for many Australians. However, with interest rates now 0.75% lower today than where they were at the start of this year, finding a cash investment offering even a 4% interest rate is now a challenge.
That's why savers might want to consider moving their money from cash investments to ASX dividend stocks.
Although inflation is now well under 3%, keeping your money in a term deposit or savings account might still not protect your capital from inflation, even if it's yielding 4%. That's because any interest income is taxed at your full ordinary rate, leaving you with minimal real returns.
That's where ASX dividend stocks can help.
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How ASX dividend stocks beat cash investments
Dividend stocks do not offer capital protection of any kind. However, they do offer a shot at getting substantial, above-inflation returns and a tax break to boot.
Not all ASX dividend stocks are equal, of course. The best ones tend to offer goods or services that investors either love to buy or find difficult not to buy.
Stock market investors have the choice to figure out which ASX dividend stocks fit this bill themselves, or else just opt for an index fund or similar.
Even a basic ASX index fund has historically far outperformed cash investments. To illustrate, the Vanguard Australian Shares Index ETF (ASX: VAS) has returned an average of 9.39% per annum since its ASX inception in 2009 (as of 31 July). That includes dividend returns, which, for an index fund like VAS, typically come in at 3-4% per annum. Further benefits come from tax breaks, mainly the franking credits that usually come attached to most ASX dividend payments.
This potential for higher returns comes at a cost, of course. Shares, and the dividends that they pay, can be highly volatile. If security and capital protection are aspects you value above maximising returns, you might still want to keep your cash in the bank. But if you have a long-term horizon and want to see your dollars working as hard as they can for you, consider ASX dividend shares.
