The majority of analysts seem to agree that the Reserve Bank of Australia (RBA) will once again cut the official interest rate when they meet in October. Below I discuss three ASX shares, Challenger Ltd (ASX: CGF), Transurban (ASX: TCL) and Coles Group Ltd (ASX: COL), which investors might consider as an alternative to interest from a bank account.
The Income Dilemma For Retirees
When the RBA meet next week it’s highly likely they will cut interest rates by another 0.25%, bringing the official cash rate to a new all-time low of 0.75%.
Lower interest rates are obviously bad for savers and it forces those living off savings into riskier asset classes like shares or property in order to generate enough income to fund their ongoing lifestyle.
Think of a retiree who has $1,000,000 to live off as a nest egg. 10 years ago they could have had all their money tucked safely away in the bank taking virtually no risk with their capital generating around $70,000 per annum (7% interest).
Fast-forward to now and that same $1,000,000 would be lucky to generate $20,000 (2%) and with most banks, it would be much closer to $15,000 (1.5%). Even on a diet of baked beans on toast, it would be hard to make that work!
It’s not all bad news though. I think that with the careful selection of quality ASX dividend shares an investor could generate additional income to fill the void.
Here a three ASX shares that I think provide a great alternative to low-interest rates and also have the potential of long term capital growth.
Challenger Ltd (ASX: CGF)
Annuities provider has seen its share price come off significantly over the past 12 months. I think most of the issues that have dragged the share price lower are predominately temporary in nature. And with the long term thesis still well and truly intact it has created an opportunity for patient investors to pick up shares cheaply.
Despite the Challenger share price rebounding about 15% from its lows, I think the current price still represents a very good entry point for investors. Challenger shares trade on a healthy dividend yield of 4.8%.
Transurban Group (ASX: TCL)
Transurban owns and operates toll roads in Australia’s three largest cities and also in the greater Washington area of the U.S.A. CityLink in Melbourne is Transurban’s biggest asset which accounts for nearly one-third of all toll revenue.
Transurban provides relatively predictable earnings and is one of those stocks that becomes increasingly popular when interest rates are falling. Investors in the toll road operator have done extremely well with the share price up more than 25% this year.
The company has given distribution/dividend guidance of $0.62 for FY20 which places the shares on a forward-looking dividend yield of 4.24% at the current share price.
Coles Group Limited (ASX: COL)
Operating one of Australia’s two largest supermarket chains Coles provides a defensive stream of earnings. Even in dire economic times people are still going to need to buy groceries. This feature provides some downside protection for shareholders during a decline in the economy.
I won’t deny there is a threat posed by the likes of German supermarket powerhouse Kaufland or even Aldi, which has been nibbling away at Australia’s supermarket duopoly, but you need to keep things in perspective. Coles and Woolworths (ASX: WOW) still account for the vast majority of our grocery dollars and this is unlikely to change in the near future.
Trading on a forecast dividend yield of 4.7% Coles shares are another solid option to beat low-interest rates.
Which Would I buy First?
My pick of the three shares above would be Challenger (it’s one I own) because I think it provides the best opportunity for long term capital growth with a backdrop of an aging population.
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At the time of publishing, Luke owns shares in Challenger Ltd.