ASX bank shares like National Australia Bank Ltd (ASX: NAB) have been in the news quite a bit over the past 12 months or so.
The big four banks were some of the best-performing blue-chip shares on the ASX in 2024, with all four of the majors enjoying double-digit share price appreciation.
Of course, Commonwealth Bank of Australia (ASX: CBA) was the poster child for these gains, with CBA shares hitting dozens of new all-time highs last year.
NAB shares weren't left out in the cold though, with this bank up 22% over the past 12 months at today's pricing.
This has been wonderful for anyone who already owns NAB shares. However, as any good dividend investor knows, rising share prices have the unwelcome inverse effect of lowering a company's trailing dividend yield, all other things being equal.
To illustrate, NAB shares have forked out a total of $1.69 per share in dividends over the past 12 months. At the $32.34 share price that NAB was trading on 12 months ago today, this would result in a dividend yield of 5.23%. But at the current NAB share price of $39.40 (at the time of writing), the yield is just 4.28%.
So if NAB keeps its 2025 dividends steady at 2024 levels (which is, of course, not guaranteed), that's how much yield in dividend terms you can expect from buying NAB shares today.
But what if, instead of buying NAB shares, you opt for a NAB term deposit instead?
NAB shares: Does the dividend still beat a term deposit?
Well, the answer is no.
Right now, the top term deposit interest rate that you can earn from NAB is sitting at 4.75% per annum, with interest paid at maturity. That's for an 8-month term deposit mind you, so you won't be able to earn that full rate with just one term.
However, you can secure an interest rate of 4.4% if you opt for a 12-month term, or 4.3% if you wish to receive your interest monthly.
So yes, a term deposit from NAB today can indeed beat the dividend yield currently offered by NAB shares.
A few caveats
There are a few caveats to mention here though. Firstly, with the addition of NAB's full franking credits, owners of NAB shares still come out on top. That's because franking credits allow one to deduct company tax already paid by NAB when tax time rolls around, which makes the dividend income from NAB decidedly more tax-friendly. In contrast, interest income is almost always taxed at the full rate.
So, while NAB shares might yield 4.31%, this yield can be grossed up to 6.16% to reflect this franking advantage.
Secondly, investing in a term deposit is essentially risk-free (up to $250,000 anyway), thanks to the government guarantee on Australian bank deposits.
In contrast, investing in the share market is not risk-free. There's no guarantee that NAB shares will even pay out a dividend next year. Or if they do, there's no promise that it will match last year's annual payout.
Additionally, as everyone knows, share prices move up and down every day that the market is open. As such, it is very possible that if you need your money back in a hurry, you won't be able to fully recuperate your initial investment.
As with all investments, one needs to balance the appetite for risk with the reward one wishes to enjoy when deciding whether a term deposit or a dividend is the preferred investment.
