How COVID-19 has changed our use of cash

Investors and savers need to be prepared for another hit, writes Anthony Keane

SINKING share dividends and bank term deposit rates are forcing investors and savers to rethink just how they get their income.

Interest rates paid on deposits have been dropping for a decade – from 7 per cent to less than 1 per cent – and the recent dividend crunch has taken some investors by surprise and exposed a lack of cash backups.

Westpac and ANZ have suspended dividends, NAB slashed its interim dividend from 83c to 30c a share, and other companies have been cutting their payouts to shareholders.

Meanwhile, the base rate for online savings accounts offered by the big four banks sits at just 0.05 per cent, and their promotional periods offering around 1 per cent last for just three to five months.

More than 160 term deposit products have had rate cuts this month, but there are still deals offering more than 1.5 per cent for those willing to shop around.

Smaller banking institutions’ rates are generally higher and are protected by government guarantees.

Catapult Wealth director Tony Catt said despite the low current returns, he was telling clients to expect term deposit rates to halve again soon.

“We need to be prepared for another hit, particularly on term deposit products, in the next six months,” he said.

“There’s a clear expectation that interest rates are not moving up any time soon.”

Mr Catt said falling bank deposits and disappearing dividends highlighted many people did not have a “liquidity strategy” – cash on hand to get them through at least a year of tough times without having to sell assets.

“Things like this will happen again,” he said.

“You may not be able to change too much at the moment, but you can say ‘what can I learn from this?’”

Mr Catt said he expected total dividends for 2020 for the ASX top 200 stocks to be about 70 per cent of 2019’s payouts, and about 80-85 per cent next year.

“We can’t see it getting back to PRE-COVID levels for at least two years,” he said.

Ausbil Investment Management executive chairman Paul Xiradis said it was hard to determine the impact of COVID-19 on dividends, but investors could use the Global Financial Crisis as a guide.

In the 2008-09 GFC, 65 per cent of companies cut or suspended dividends and total payments fell about 30 per cent, Mr Xiradis said.

“We are expecting a similar impact this time around, however, we also expect this to be temporary,” he said.

“We consider food retailing, telecommunications, pharmaceuticals – especially CSL – agriculture, technology, regulated utilities, iron ore and gold producers to have a relatively low risk of dividend reductions.”