Investors beware: Banks are cutting your term deposit rates

Deposit rates are falling as banks try to wring the most they can out of cheap offshore funding

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If ever there was a time when investors needed to look beyond term deposits to generate decent returns on their investments, it’s now.

Thanks to the cheapest funding available offshore since the GFC, local Australian banks are cutting their interest rates on term deposits as well as mortgage loans.

According to comparison website, finder.com.au and the Australian Financial Review (AFR), every term deposit has seen its interest rate shaved between October 2013 and now. The median 180-day rate slumped from 3.7% to 3.25%, while the median 90-day rate fell from 3.65% to 3.3%.

And that’s from the usual group of high interest payers, including Westpac Banking Corporation (ASX: WBC) owned St George, Citibank, Bank of Queensland (ASX: BOQ), ING Direct, HSBC and Bankwest – owned by Commonwealth Bank of Australia (ASX: CBA). At those rates, the real return after tax and inflation would be lucky to be 1%.

I don’t know about you, but I’ll take a fully franked dividend yield of 5%, or higher, against those rates any day.

And investors don’t have to turn to the big four banks to earn a yield of more than 5% either. Based on data from Capital IQ, 198 ASX-listed companies are paying a trailing dividend yield of more than 5%.

Add in the franking credits available from most of them, and the gross yield is more than double what you can get on the average term deposit.

As these examples illustrate, you don’t have to buy into tiny or high-risk companies to get that yield. Australian Leaders Fund Limited (ASX: ALF), a listed investment company with a market cap of $354 million, is currently paying an annualised fully franked yield of 7.1%, and holds a wide variety of stocks. And Telstra Corporation Ltd (ASX: TLS) is still yielding 5.5%, fully franked, with plenty of potential for higher dividends in the years ahead.

If you have ever thought that leaving all your cash in a term deposit was the best way to accrue long term wealth, hopefully this article will persuade you – even just a little bit.

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

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