To me, buying S&P/ASX 200 Index (ASX: XJO) shares is still a really attractive investment option compared to earning interest from cash in the bank.
Interest rates on bank savings accounts have jumped as the Reserve Bank of Australia (RBA) has pushed the target cash rate to 4.10% to control inflation.
Some bank accounts now offer an interest rate of 5.50%, which is much more than what savers were enjoying two years ago. With a rate of 5.50%, savers can gain a risk-free return of more than half of what the average long-term share market return has been (around 10%).
Why I prefer ASX 200 shares for dividend income
I'm glad that savers are now getting a much better return, and I do have cash in a bank account. I am talking specifically about where I'd put money to make an investment return.
If I deposited $100 into a bank account with a 5.5% interest rate, I'd get $5.50 after 12 months. But, if I want to utilise that cash for my own uses, then I'd be left with $100 again. I can leave the $5.50 in there for it to compound, but there's no organic growth of the interest paid by itself (aside from RBA rate changes).
With a decent ASX 200 share, the company can make a profit and pay out some of that profit as a dividend. We can either spend that cash or re-invest it into more shares. The company can re-invest some of the retained profit, which can help grow its profit and dividend next year.
I think ASX 200 shares offer that potential growth and stronger compounding.
For example, Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) recently paid an interim dividend of 36 cents per share, which was 24% higher. A decade ago, the interim dividend per share was 18 cents, so it has doubled in a decade. Shareholders could have spent every dividend between now and then, and still seen all that dividend growth.
Inflation and growth
Let's not forget the other side of investment returns – capital growth. If I put $100 into a bank account, it will still be worth $100 after a year or five years, excluding the interest. Inflation steadily eats away at the value of that $100.
Decent ASX 200 shares will be able to grow their earnings over time. Profit growth can drive share prices higher, which is why plenty of businesses are able to deliver capital growth for investors.
Inflation and a rising population are a natural boost for earnings for companies like Telstra Group Ltd (ASX: TLS) and Coles Group Ltd (ASX: COL).
An ASX 200 share investment can deliver capital growth and dividend growth over time. The money we make from ASX shares can also come with tax benefits such as franking credits and the capital gains discount.
Putting that together, I think ASX 200 shares are a more attractive place to invest. It's just a case of putting up with volatility and investing in quality companies.
