On Tuesday, we got the dramatic news that the Reserve Bank of Australia (RBA) has increased interest rates for the fifth time this year. At 4.85%, the cash rate is now at its highest level since late 2008 (let that one sink in).
This is painful news for many people. Mortgage holders, of course, as well as any individuals or businesses with a floating loan or line of credit. But also the economy more broadly. Interest rates work to slow economic activity, which obviously doesn't bode well for many Australians.
With interest rates this high, the way we look at ASX shares as investments is quite different to how we may have when the cash rate was essentially zero a few years ago.
Back then, the appeal of ASX dividend shares was clear. They provided a real source of income, which, together with franking credits, was a clear advantage over cash-based investments. Not to mention real estate. Although real estate values skyrocketed during this zero-rate era, rental yields didn't really keep up. That left ASX shares as the primary way to secure real yield.
What a difference a few years makes.
With the cash rate now at 4.85%, the calculations look very different. The value of ASX shares have arguably held up quite well, given the steep climb that interest rates have been on in 2026. As it stands today, the S&P/ASX 200 Index (ASX: XJO) is pretty much at the level it was this time last year.
That means that the dividend yields on many popular ASX income stocks are still relatively subdued. Sure, you can bag a fully franked yield of over 4% from the likes of Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Telstra Group Ltd (ASX: TLS). But these companies are hardly growth engines.
Slightly more exciting dividend payers, like perhaps Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES) or Washington H. Soul Pattinson and Co Ltd (ASX: SOL), currently offer yields well below 4%.
High interest rates and ASX income stocks
This might be acceptable for many ASX investors. After all, shares have consistently proven to be the most lucrative asset class to invest in long-term. That's regardless of the rate of inflation, interest rates, or the health of the broader economy. However, for those investors who regard yield and cash flow as more important than overall returns, it might be a no-brainer to start branching out from stocks.
With the cash rate now at 4.85%, the yields available from cash-based assets are now far higher than what most ASX dividend shares are offering. Consider the BetaShares Australian High Interest Cash ETF (ASX: AAA). This exchange-traded fund (ETF) is now offering a cash yield net of fees worth 4.92% per annum. That will probably rise even higher very soon. Since this ETF only holds cash-based assets issued by major ASX banks, there is virtually no risk of permanent capital loss if one invests in it. That's a compelling proposition for income-focused investors.
Another similarly-structured ETF, the iShares Enhanced Cash ETF (ASX: ISEC), offers something similar.
The upside of higher interest rates is that one can achieve a real, and risk-free, yield from these kinds of ASX ETFs. You can also bypass the market entirely and open your own savings account or term deposit right now. You'll probably find you can snag an interest rate above 5.5% per annum if you look hard enough.
The post With interest rates at 18-year highs, this ASX income stock is a no-brainer appeared first on The Motley Fool Australia.
Motley Fool contributor Sebastian Bowen has positions in Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers. The Motley Fool Australia has positions in and has recommended Telstra Group and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has recommended Wesfarmers. 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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