Banks slash term deposit rates: Time to buy these 3 blue chip dividend stocks

Term deposits and bonus saver accounts no match for fully franked blue chip dividend stocks

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Australia's big banks have sliced their term deposit rates, with new data showing that interest rates across 3-month, 6-month and 1-year term deposits have been slashed.

National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) have quietly cut rates on 3-month deposits by at least 20 basis points since June, according to The Age.

With most term deposit rates around 3%, that's only slightly ahead of inflation and another reason to consider quality stocks paying decent dividend yields. Add in franking credits and there are still many companies paying pre-tax rates of more than double the term deposit rate.

RateCity analyst Peter Arnold has told The Age that the cuts raised the risk that saver's funds would be rolled over into a product with a much lower rate when the deposit reached maturity.

"It's less competitive that it was six months ago," he said, adding, "Savers need to make sure that they don't roll over into a lower rate."

The Reserve Bank of Australia (RBA) has also noted that there was less competition for term deposits, allowing the banks to cut rates and lower their cost of funding. Earlier this week, the RBA noted that depositors continue to move away from term deposits, compared to bonus saver accounts.

It seems investors have got half the strategy right.

Bonus save accounts are offering only slightly better rates of up to 4% in online savings accounts – still no match for dividend yield stocks.

Insurance Australia Group Ltd (ASX: IAG) is paying a trailing dividend yield of 5.9%, fully franked, which grosses up to around 8.5% – more than double the best bonus saver account.

Even Telstra Corporation Ltd (ASX: TLS), a favourite of the SMSF crowd, is still paying a trailing fully franked dividend yield of 5.2%, which grosses up to 7.4%, when you include franking credits. And that's despite trading near 13-year highs.

And if you want a solid blue chip stock, Woolworths Limited (ASX: WOW) is paying a 4% fully franked yield, grossing up to 5.7%. And investors are getting the potential capital gains thrown in for free.

It's clear that high yield, solid blue chip companies are a better bet than term deposits and bonus saver accounts.

Motley Fool writer/analyst Mike King owns shares in Telstra and Woolworths. You can follow Mike on Twitter @TMFKinga

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