Interest rates at 3.85%! Can I now earn more with a term deposit than ASX shares?

Is your money better off in a bank than bank shares?

A woman looks questioning as she puts a coin into a piggy bank.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Earlier this month, the RBA raised interest rates to an 11-year high of 3.85%
  • This has resulted in term deposits offering interest rates of up to 5% per annum
  • However, ASX dividend shares are still the better option for the vast majority of income investors out there, thanks to franking and other benefits

Earlier this month, the Reserve Bank of Australia (RBA) raised interest rates. Again. The hike of 0.25% was the 11th hike the RBA has ordered since May 2022, taking the cash rate up to 3.85%.

In the media, we tend to hear about the pain this steep trajectory of rate hikes is inflicting upon mortgage holders more than anything else. And whilst it is true that mortgagees are carrying the burden of the interest rate hikes, they also have a profound, and opposite, impact on savers.

Rising interest rates also mean that the rates of interest that banks and other credit institutions can offer for savings accounts and term deposits have also been rising sharply. At the start of 2022, it was difficult to find a term deposit that was offering an interest rate of more than 1%. But today, the picture is starkly different.

Right now, financial institutions are offering term deposits with interest rates of up to 5% per annum. You can get a 5% term deposit with Judo Capital Holdings Ltd (ASX: JDO) at present, for example. Keep in mind that is for a five-year term though. Similarly, AMP Ltd (ASX: AMP) is currently offering a top interest rate of 4.7% for one year, as long as you have at least $25,000 to deposit.

So with term deposit interest rates at highs we haven't seen for years (possibly a decade), is this the path that income-hungry investors should go down? Do term deposits offer more potential cash flow than ASX dividend shares?

Are term deposits the new dividends?

Well, in some cases, it certainly seems that way. To illustrate, AMP's 12-month term deposit certainly looks like it is yielding more than what Commonwealth Bank of Australia (ASX: CBA) shares are offering right now. At present, CBA's dividend yield is sitting at 4.22%. So that 4.7% or 5% looks pretty attractive.

Those rates are also higher than the current yields from other ASX dividend heavyweights like Telstra Group Ltd (ASX: TLS), Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES).

However, I would argue that term deposits are rarely the right choice for an investor seeking cash flow. Unless capital preservation is a key priority of your investing strategy, it is likely that quality dividend shares can offer you far more than a term deposit can.

For one, there are many ASX dividend shares on the market today offering yields well over 5%. National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and ANZ Group Holdings Ltd (ASX: ANZ) all currently have dividend yields well in excess of 5%. As does BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Woodside Energy Group Ltd (ASX: WDS).

And that's before we get to franking. Term deposits don't come with franking credits, which means that you will pay full tax on any interest earned. But most of the dividends from all of the companies mentioned today typically come fully franked.

Dividends win almost every time

Franking can add substantial value to your dividend payments, thanks to the tax savings (or cash refunds) they can help you achieve. For instance, the CBA raw dividend yield is at 4.22% today. But if you factor in the bank's full franking credits, this yield grosses up to 6.03%.

One final point in favour of ASX dividend shares. Buying a share means buying into ownership of a business. The value of that business can compound over time, and deliver you substantial capital growth, as well as regular dividend income. We explored how this looks for a quality ASX dividend share just yesterday.

In contrast, with a term deposit, your principal can never increase as long as you have it locked up in a bank. You are also forbidden from accessing that cash, at least without penalty, until the term has expired.

So unless you are an investor that values capital protection above anything else, I would argue that almost every investor is still better off with quality ASX dividend shares than a term deposit today, even with interest rates at an 11-year high.

Motley Fool contributor Sebastian Bowen has positions in NAB, Telstra and Wesfarmers. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Judo Capital. The Motley Fool Australia has positions in and has recommended Telstra Group and Wesfarmers. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Man pointing an upward line on a bar graph symbolising a rising share price.
Dividend Investing

3 growing ASX dividend stocks to buy now

Analysts are expecting these stock to paying growing dividends.

Read more »

Man holding out $50 and $100 notes in his hands, symbolising ex dividend.
Dividend Investing

Where I'd invest $5,000 into ASX dividend shares right now

These two stocks look irresistible to me.

Read more »

Smiling business woman calculates tax at desk in office.
Dividend Investing

Turn tax return into passive income with these ASX dividend shares

These options can bring solid returns through passive income. 

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Dividend Investing

Forget term deposits, these ASX dividend shares offer ~5% to 11% yields

Analysts think these shares could be better than term deposits. Let's find out what yields they offer.

Read more »

Tax time written on wooden blocks next to a calculator and Australian dollar notes.
Tax

Tax time: Use this hack to keep the Australian Tax Office off your back

Buying dividend shares can save you paying taxes...

Read more »

Man smiling at a laptop because of a rising share price.
Dividend Investing

2 exciting high-yield ASX dividend shares I'd buy in June

These stocks have a lot to offer investors focused on income.

Read more »

A male investor sits at his desk looking at his laptop screen holding his hand to his chin pondering whether to buy Macquarie shares
Dividend Investing

Looking for passive income amid falling interest rates? Check out this top ASX All Ords dividend stock

This high-yielding ASX dividend stock can help boost your passive income amid falling interest rates.

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Dividend Investing

Down 34% since 2021, does this ASX dividend share still offer investors a 10% yield today?

There are a few warning signs over this stock.

Read more »