Most Australian retirees and savers will tell you the recent era of low interest rates has been painful.
They've had to endure falling returns on their cash in savings accounts or term deposits year after year for many years. In fact, since 2010. That was the last time interest rates went up before hiking began in 2022.
So, for a 12-year period, cash hasn't been an attractive investment avenue for many people. So, what did they do?
Well, many piled into S&P/ASX 200 Index (ASX: XJO) shares — specifically those delivering good income streams.
With interest rates on savings and term deposits now going up, will investors ditch dividend shares?
Why ASX dividend shares are 'likely to remain attractive'
Shane Oliver, chief economist and head of investment strategy at AMP Capital, writes on Livewire:
Australian shares offer an attractive dividend yield. This is particularly so compared to bank deposits.
Companies don't like to cut their dividends, so the income flow you are receiving from a well diversified portfolio of shares is likely to remain attractive, particularly against bank deposits even though deposit rates are slowly rising.
What about market volatility?
Of course, ASX dividend shares are not immune to market falls like we've seen in 2022.
What does Oliver say to those investors who'd rather be in cash but can't due to low returns?
Oliver muses:
Bouts of volatility are the price we pay for the higher longer-term returns from shares compared to other assets like cash and bonds.
… the value of $1 invested in various Australian assets in 1900 allowing for the reinvestment of dividends and interest along the way… would have grown to $243 if invested in cash, to $881 if invested in bonds, and to $691,806 if invested in shares.
While the average return since 1900 is only double that in shares relative to bonds, the huge difference between the two at the end owes to the impact of compounding returns on top of returns.
So, if we want to grow our wealth, we need exposure to growth assets like shares to make the most of the power of compound interest, but with that comes rough patches every so often.
Which ASX 200 shares are the best dividend shares?
ASX 200 bank shares and mining shares are typically seen as among the best ASX dividend shares.
This is because our big four banks and major miners are well-established, profitable businesses. Thus, they've been able to dole out strong dividends every year regardless of economic or market conditions. Plus their dividends are typically 100% franked. Bonus.
Due to these companies' size and market share, they're also viewed as safer investments for retirees, who are often concerned about capital preservation in addition to generating enough income to live on.
Dividend yields of ASX 200 bank shares and mining shares
For the record, RateCity reported on 4 October that the best savings rate in the market was 4.1%.
Here is a snapshot of current dividend yields among the ASX 200 banks and mining shares, according to the ASX website:
- Westpac Banking Corp (ASX: WBC) dividend yield 5.11%
- National Australia Bank Ltd (ASX: NAB) dividend yield 4.42%
- Commonwealth Bank of Australia (ASX: CBA) dividend yield 3.83%
- Australia and New Zealand Banking Group Ltd (ASX: ANZ) dividend yield 5.57%
- BHP Group Ltd (ASX: BHP) dividend yield 11.22%
- Rio Tinto Limited (ASX: RIO) dividend yield 11.13%
- Fortescue Metals Group Limited (ASX: FMG) dividend yield 12.02%
A word to the wise: These ASX 200 mining share dividends are nuts. They're well above average because of the current commodities price boom.
Commodities are cyclical so these dividend yields are not indicative of average long-term levels of income returns for investors. They're indicative of sky-high commodity prices due to the Russia-Ukraine war and COVID-19 recovery.
But you see our point. Even if you cut these yields in half, they'd still be higher than savings deposit rates.
To find out which ASX dividend shares our Australian Fool writers recommend, view our monthly report.
