I looked at term deposits this morning to see what rates I could get on some cash that I need to squirrel away for a few months. According to comparison website finder.com.au, Citi pays a juicy 3% – if I have $250,000 that I don't need.
Bank of Melbourne will give me 3.2%, if I lock it away for 3 years, and RaboDirect will give me 3.3%, if I lock it away for 5. Why bother? With those sorts of timeframes in mind, I could just about invest the money in shares instead.
Yes, the sharemarket could crash and no, there is no guarantee I'll get my money back when I want it. There is a definite place for term deposits in the market – but fact is, dividends leave them for dead. Here are 3 companies whose dividends smash term deposits right now:
National Australia Bank Ltd. (ASX: NAB) – yields 6% fully franked
Most readers will be familiar with National Australia Bank, whose shares have been left behind in the recent run-up in bank prices. It pays the biggest dividend of the 'Big 4' banks and is one of the cheapest in Price to Book (P/B) terms.
Dicker Data Ltd (ASX: DDR) – yields 6.7% fully franked
This computer software and hardware distributor has been growing at a respectable clip over the last few years and aims to pay 100% of its profit as dividends, hence the big yield. That does leave the dividend highly vulnerable to any business downturns, but you can't knock 6.7% fully franked.
Telstra Corporation Ltd (ASX: TLS) – yields 7.5% fully franked
Broadband and mobile business Telstra Corporation makes a lot of money from society's growing fixation with mobile devices and the internet, while its plunging share price (due to fears of competition and falling profits) have seen its dividend balloon out to 7.5%, with franking credits on top.
Foolish Takeaway
As well as additional risks, there are 2 main advantages to dividends over a term deposit:
1) They are attached to companies which can grow earnings and dividends (and the share price), and
2) They come with franking credits attached. Fully franked companies confer a tax benefit on many shareholders that can result in a big boost to the effective dividend yield.
