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Why fully-franked dividends are better than cash

According to Commsec, term deposits held by the banks fell 5.7% to $510 billion in the year to August 2015.

Looks like investors are sick of getting 3% or less per annum to hold their cash in term deposits, when they can easily pick up 6%, 7% or more from fully franked dividends on offer from a host of blue chips. New term deposits are currently offering around 2.7%, so it’s no wonder investors are looking for a higher rate of return.

At 3% or less, investors are virtually treading water or going backwards when you consider inflation is around 2%.

Many retirees rely on interest income from term deposits for cashflow – without that, they have little choice but to look elsewhere.

With many predicting that the Reserve Bank could be forced to lower rates again, term deposit rates appear headed even lower.

Given that the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have been forced to curb their lending to property investors, they could also be looking at making up the difference through lower term deposit rates.

All the signs point to even lower term deposit rates ahead, making fully franked dividends even more attractive.

The usual stop for older investors looking for income has been the big four banks. At current prices, the fully franked dividend yields are very tempting.

Bank Share price Dividend yield Grossed up yield
ANZ $27.49 6.6% 9.4%
CBA $73.81 5.7% 8.1%
NAB $30.53 6.7% 9.6%
Westpac $30.18 6.1% 8.7%

Source: Google Finance

The table above shows that investors can receive around 3 times the return from bank dividends compared to term deposits.

Ok, cash and shares are at opposite ends of the scale when it comes to risk. Cash never loses its principal amount – unless you have negative interest rates, but share prices can fluctuate wildly, and dividends can be cut.

As an example, CBA’s share have lost $22.34 from their high of $96.17 set in march this year, or 23%, easily outstripping the dividend payment of $4.20 shareholders have received this financial year. No banks have yet cut their dividends, but will likely be under pressure to do so in the near future.

But for many investors who have no intention of selling anytime soon, what’s not to like about an 8.1% yield from dividends?

Foolish takeaway

I’ve used the big four banks as an example, but thanks to the recent market falls, there are plenty of other stocks also offering fully franked dividend yields of above 5%. It’s a no-brainer when it comes to comparing term deposits and dividends.

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Motley Fool contributor Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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