As most Australians would be aware, interest rates have been skyrocketing over the past 12 months or so. At the start of 2022, the cash rate was still stuck at the COVID-era record low of 0.1%. But the Reserve Bank of Australia (RBA) has raised rates 11 out of the past 12 times it has met for its monthly meetings (most recently this month).
As a result, the cash rate stands at a far higher 3.85% today. That means several things. For once, mortgages are now a heck of a lot more expensive than they were just 12 months ago.
But it also means the rate of return we are able to get from cash investments is also far higher. But even after these successive rate hikes, it is still difficult (although not impossible) to find a savings account or term deposit yielding above 5% per annum.
To illustrate, Commonwealth Bank of Australia (ASX: CBA)'s top term deposit rate is now sitting at 4% per annum. But to achieve that, you need to lock up at least $50,000 for 60 months.
Can you beat a 5% term deposit?
Now, many Australians, especially those who might have retired, will probably appreciate the capital protection and income certainty that a term deposit can provide. But I argue that most savers might be better parking their cash into ASX dividend shares instead.
Some ASX dividend shares offer better yields than 4% straight off the bat right now. For example, investing in the CBA share price will bag you a dividend yield of 4.27% on recent pricing. Already that's beating the bank's own term deposit rate (without the need to lock the cash away for five years).
Many ASX shares do even better than that. CBA's banking stablemate Westpac Banking Corp (ASX: WBC) presently has a dividend yield of more than 6% on the table.
And a company like JB Hi-Fi Ltd (ASX: JBH) is offering more than 7.6%.
What's better, all of these dividends come with full franking credits too. This can boost the real return from these dividends by an additional 43% or so. To illustrate, CBA's dividend yield is 4.27%. But if we gross this yield up with CBA's full franking credits, we get a grossed-up yield of 6.1%.
And we haven't even got to the best bit yet. A term deposit offers no possibility of capital appreciation. You simply get your principal back at the end of the term, with your interest attached. But an ASX share can (and often does) grow in value over time.
ASX dividend shares can offer both growth and income
If a company expands its profits, it will have even more cash in the bank the following year that it can use to increase its dividend. The best companies can consistently become ever more profitable, gifting their loyal investors with an ever-rising share price, matched with an ever-rising dividend.
Just look at the Washington H. Soul Pattinson and Co Ltd (ASX: SOL) share price over the past decade below if you want proof:
Yep, Soul Patts shares have more than doubled in value over the past decade, thanks to capital growth. But this company has also increased its annual dividend every single year over this period too. Soul Patts funded 44 cents per share in dividends in 2012. But by 2022, this had risen to 72 cents.
Term deposits can be great if you value capital preservation and certainty above all else. But if you want the best bang for your bucks, then a good ASX dividend-paying share wins every time.
