Are Coles dividends better than a savings term deposit?

We check whether the Coles dividend is still higher than returns from a cash savings account.

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Key points

  • With interest rates remaining at record lows until recently, ASX dividend shares were one of the only options for yield
  • But times have changed and now interest rates are rising, and fast
  • So how do Coles' dividends stack up gainst a cash investment today?

Over the past several years, holding ASX dividend shares almost invariably gave investors better returns than a savings account or term deposit. That depended on the dividend shares in question, of course. But it really wasn't hard for most dividend payers, including Coles Group Ltd (ASX: COL) shares, to compete with cash investments when the Reserve Bank of Australia (RBA) was keeping the cash rate at the record low level of just 0.1%.

But, as we were reminded just yesterday, times have changed.

Rising inflation has kicked the RBA out of bed. Yesterday saw the Reserve Bank lift interest rates yet again. This time, it was another 0.5% hike, the fifth in a row. It took the cash rate to a seven-year high of 2.35%.

As a result of these rapid-fire interest rate rises, cash investments are suddenly looking a whole lot more competitive against dividend shares.

So let's talk about the Coles share price. Coles has been a friend to ASX dividend investors during the past couple of COVID-dominated years. Unlike many ASX dividend shares, Coles managed to keep its fully-franked dividends flowing over 2020 and 2021.

In fact, the ASX 200 grocer hiked its dividends from 35.5 cents per share in 2019 to 57.5 cents per share in 2020 and 61 cents per share in 2021. 2022, thus far, has seen the company hike its dividends again, with Coles on track to fork out 63 cents per share in 2022.

So on the current Coles share price, this works out to give the company a dividend yield of 3.61% today. With the company's full franking, that grosses up to a healthy 5.16%.

But how does this compare to what savings accounts and term deposits are offering today?

How does the Coles dividend stack up against holding cash right now?

Still quite well, as it turns out.

At present, none of the big four banks is offering interest rates on savings accounts over 3%. The highest rates from any Australian banking institution for these products extend to around 3.3%.

When it comes to term deposits, investors can expect a little more, with the highest term deposit interest rates sitting at around 4%. But those are for terms longer than one year, so investors have to lock their money up for a while.

The highest rates for a 12-month term deposit are presently at around 3.6%. So Coles' dividends still come out on top.

But interest rates are still rising. The RBA has not flagged that we are near the top of the interest rate cycle just yet, so we can probably expect more rate rises over the rest of the year. This could push up returns on cash products even further.

But we are not there yet and, at present, the Coles dividend is certainly offering a better yield than what a typical savings account or term deposit is.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended COLESGROUP DEF SET. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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