Commonwealth Bank Of Australia (ASX: CBA), Sydney Airport Holdings Pty Ltd (ASX: SYD) and Insurance Australia Group Limited (ASX: IAG) are three high-quality ASX shares that provide an alternative to falling interest rates.
As you can imagine, the RBA rate cut earlier this week was a blessing to many struggling homeowners but was a source of great frustration for many self-funded retirees. With further rate cuts likely, savers can expect to receive anemic returns on their cash into the foreseeable future.
Below, I’ve listed three high-quality ASX shares that offer a strong yield whilst also offering the potential for share price appreciation
Sydney Airport
Sydney Airport Holdings operates Sydney’s Kingsford Smith Airport on a 99-year lease set to expire in the year 2097. In 2018 the airport was used by 44.4 million passengers, making it by far Australia’s busiest airport.
Sydney Airport has consistently grown profits and the accompanying dividends as passenger numbers have increased. Natural long term growth comes from an increasing population in Greater Sydney whilst a falling Australian dollar may also help to boost inbound tourism in the medium term, further driving revenue growth. At the current share price, Sydney Airport offers a reliable dividend with a trailing yield of 5.1%.
Commonwealth Bank
Commonwealth Bank Of Australia or CBA is Australia’s largest bank with more than 16 million customers. With a market value of $140 billion it is indeed Australia’s largest ASX-listed business by some distance.
With the RBA cutting interest rates earlier this week and the likelihood of future rate cuts high I expect the declining housing market to be revived, or at the very least the falls in property prices to be halted.
APRA’s recent decision to loosen lending requirements on the banks will make it easier for CBA to offer loans to willing customers. Lower interest rates and more relaxed lending requirements make getting loans easier for borrowers. This all benefits CBA as in simple terms, the more loans the banks can approve to customers the more profits they make.
At the current share price, CBA offers a 5.5% dividend yield. Whilst this is slightly lower than peers National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) both with a dividend yield of 6.8%, it compares similarly to the 5.6% dividend yield of Australia And New Zealand Banking Group (ASX: ANZ).
Insurance Australia Group
IAG is Australia’s largest insurance business. IAG’s insurance businesses ‘underwrite’ more than $11.4 billion of insurance premiums per year. Insurance is sold under many brands including NRMA, CGU and SGIO.
IAG has been increasing its underlying profit margin under Peter Harmer who took over as CEO in 2017. Increasing profit margins means that a higher percentage of revenue generated from the business turns into profits and consequently dividends.
In the first half of the current financial year, IAG reported a 3.2% uplift in their underlying insurance margin from the corresponding half last year from 13% to 16.2%. IAG paid out close to 80% of its cash earnings in FY18 and is expected to do likewise this year. Trading on a healthy dividend yield of 4.6% I think IAG shares offer a good alternative to the miserly cash at bank rates.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
