On Tuesday, the Reserve Bank of Australia increased the cash rate target by 25 basis points to 4.35%.
That changes the income conversation.
If an investor has a very low tolerance for risk, I think term deposits may be the better option right now. They offer a known return, no share market volatility, and very little effort.
But for investors with a normal tolerance for risk, I still think ASX dividend stocks can make a lot of sense.
The reason is simple. Term deposits may offer income, but they do not offer capital growth. Good dividend shares can potentially provide both.
Below are three stocks I would consider buying for income even as interest rates rise.
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Harvey Norman Holdings Ltd (ASX: HVN)
Harvey Norman is the kind of ASX dividend stock that may divide opinion in a higher-rate environment.
Retailers can be sensitive to household budgets, and rising interest rates can put pressure on discretionary spending. I would not ignore that risk.
But I also think Harvey Norman has a few qualities that make it interesting for income investors.
It has a long history as one of Australia's best-known retail brands, with exposure to furniture, electrical goods, appliances, and home-related spending. It also has a valuable property-backed model, which gives the business an asset base that many retailers do not have.
For me, this is not just a simple retail yield story. It is a business with scale, brand recognition, and a history of returning cash to shareholders.
The dividend can move around with earnings, so I would not treat it like a term deposit. But if investors are willing to accept some volatility, I think Harvey Norman could still play a useful role in an income portfolio.
HomeCo Daily Needs REIT (ASX: HDN)
HomeCo Daily Needs REIT is another dividend option I would consider.
What I like here is the nature of its property exposure.
The REIT owns convenience-focused and daily-needs assets, with tenants that often sit in categories such as supermarkets, healthcare, large-format retail, and essential services.
That kind of tenant mix is useful when the economy becomes more uncertain.
Higher interest rates can be a headwind for property trusts because debt costs can rise and investors can compare yields more closely with cash and term deposits.
But I think the quality of the underlying rental income is important too. HomeCo Daily Needs REIT ticks this box with its 99% occupancy and high-quality tenant base that includes Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW).
Cedar Woods Properties Ltd (ASX: CWP)
Cedar Woods is the more cyclical ASX dividend stock pick of the three, but I think it is also one of the more interesting.
The company develops residential communities and housing projects across Australia. Rising interest rates can weigh on buyer confidence, and Cedar Woods itself recently noted that sales and enquiry activity had softened recently, reflecting lower consumer confidence, rising rates, and the Middle East conflict.
But I think the bigger picture remains compelling. Australia still has a significant housing shortage, and Cedar Woods highlighted that this structural shortfall is expected to continue supporting sales volumes, while noting it will take many years to address.
The latest update also showed robust demand, with 9,663 enquiries in the third quarter, the highest quarterly result in the company's history. It also recorded 442 gross sales, its second strongest quarter on record.
Just as importantly, Cedar Woods reported record presales of more than $788 million, with over 80% of forecast FY27 revenue already presold. For me, that provides useful visibility.
This is still a property developer, so I would not call it defensive. But I do think Cedar Woods offers income investors exposure to a powerful long-term housing theme, with the potential for dividends and capital growth if it keeps executing.
Foolish takeaway
Rising interest rates make term deposits more attractive, particularly for investors who want certainty.
But I do not think they remove the case for ASX dividend stocks. For investors who can handle some market risk, I think Harvey Norman, HomeCo Daily Needs REIT, and Cedar Woods could still be worth considering.
They each offer income potential, but also something term deposits cannot provide: the chance of capital growth over time.
