Let's face it, term deposits aren't a red-hot investment idea right now. RaboDirect will pay you 3.3% per annum – if you lock your money up for 5 years. And that's one of the very best rates out there. You have to look quite hard to find shares that pay a measly 3.3% per annum – the S&P/ASX 200 (INDEXASX: ^AXJO) (ASX: XJO) index currently has an average dividend of around 4.4%.
Of course, there is a place for term deposits. Shares can crash and there's no guarantee you'll be able to get your money back when you want it. Even so, there are still plenty of great reasons to invest in shares instead of term deposits. Here are 4 of them:
Term deposits are just the nearest source of spare change
When you use a term deposit, your money doesn't just sit in a vault. The bank takes it and loans it to somebody else who pays interest on it – making a profit for the bank. Your deposit is guaranteed by the government, but at the end of the day, term deposits are just a cheap source of funds for the Australian banking industry. Commonwealth Bank of Australia (ASX: CBA) gets 66% of its funding from customer deposits.
Shares can grow earnings and dividends
When you own shares, by contrast, you own part of a business. The best you can hope for in a term deposit is getting your money back plus interest. If you own shares, you can expect to benefit in the success or failure of that business. Growing companies can grow dividends and their share price, resulting in both an increasing yield and an increase in the value of your shares over time.
Retail Food Group Limited (ASX: RFG), which owns franchises like Gloria Jeans and Brumby's, has grown its earnings and dividends at more than 15% per annum over the past decade.
Shares pay bigger dividends
As I mentioned above, the 200 largest companies on the ASX pay an average of 4.4% per annum in dividends. It's not uncommon to find reliable dividends bigger than this, as Commbank pays 4.9%, Retail Food Group yields 5.4%, and Telstra Corporation Ltd (ASX: TLS) yields a whopping 7.2%.
Shares pay franking credits
Plus, many Australian companies come with the added benefit of 'franking credits', which are essentially a refund on tax that the company has paid, reducing your tax bill at the end of the year. It's no surprise that smart investors prefer holding Australian shares to cash over the long term.
