One of the biggest themes of investing in the 2010s has been the slow-but-steady decline in official interest rates around the world – especially in advanced economies. Interest rates today stand at 0.75%, which is a record low. It's hard to believe that back in 2011, Australia had a cash rate of 4.75%, which seemed pretty low by historical standards at the time. Even in the depths of the GFC, interest rates only got down to around 3%.
Things certainly don't feel worse in the Australian economy today than they did back in 2008 and 2009, but here we are with 0.75% regardless.
Of course, one of the biggest consequences of these record low rates has been the return one can expect from 'safe' assets like bank accounts and term deposits. Term deposits used to be considered a proper investment – a safe place to make an unimpressive but rock-solid return on cash you couldn't afford to lose.
But today, a typical 1.5% term deposit won't even cover inflation, scarring the instrument's reputation as an investment altogether. That has left the conservative investors with a financial Sophie's Choice – risk your money in the share market or accept a paltry yield in exchange for safety.
Of course, for many people, there is no real choice available and so we have seen an army of reluctant investors enter the markets in the search of the safest real yield possible from dividend-paying shares in recent years.
Can dividend shares really replace a term deposit?
Well, the short answer is not completely. The most attractive characteristic of a term deposit is a safe, government-backed guarantee of yield. If you put $10,000 in a term deposit for a year, you know with absolute certainty what you're getting back at the end ($10,150 at 1.5%).
There is no equivalent mechanism on the ASX – you only get out in dividends what each company decides every year. Of course, many companies have dividend targets and guidance. But these are fickle and can change with the economic weather. The GFC forced most ASX companies to halt, cut or even scrap their dividends, regardless of how much their shareholders might have relied on those payments.
But there are stocks that pay more reliable dividends than others. Infrastructure providers like Transurban Group (ASX: TCL) and Sydney Airport Holdings Pty Ltd (ASX: SYD) come to mind. Finding companies with services that are 'essential' and broadly unaffected by what's happening in the economy are the closest you can get to a term deposit on the ASX.
So if you're looking for some ASX shares to replace that impotent term deposit, I would recommend taking a look at these kinds of companies and researching how sustainable their dividend payments might be.
