The continued downward trend of official interest rates has been great news for home owners with standard variable mortgage rates at the major banks at around 5.95 per cent down from their  peak of 7.8 per cent in 2011.

Standard variable mortgage rates are now at their lowest level since the early 1970s, while the official cash rate is at its lowest point since inflation targeting began in the early 90s.

A lot gets said about the upside of falling interest rates. However, what is often  missed is that (1) low interest rates are generally a sign that the economy is slowing and is in need of a “shot in the arm”; and (2) those reliant on interest earnings on cash to meet their income needs; i.e. self-funded retirees, are the forgotten losers.

It is for this reason that the current interest rate environment is not the best time to be holding large amounts of cash or bank term deposits. Although this strategy held many investors in good stead during the GFC when asset values were  falling, in the current environment the rate of return form term deposits is barely sufficient to offset the effects of inflation.

The following table provides a summary of the current gross dividend yields paid by the largest ten companies on the Australian Stock Exchange by Market Capitalisation.

Now I am not telling everyone to rush out and switch from all your cash holdings to the above Australian company shares. However, considering that three month term deposit rates with the four majors are currently around 3.5%, it may be time to look closely at the overall balance of your portfolio and consider some alternatives. Sure, your capital may be subject to market volatility, but it is worth noting that dividend rates only changed marginally over the course of the GFC and many companies are now in far better shape – and paying higher dividends – than ever before.