We're arguably living in a strange time on the ASX. With the stock market, and thus many ASX dividend shares, up so convincingly in recent years, normal expectations that have been in place for decades are starting to look a little shaky.
For the first few years of my own investing journey, it was normal to expect a dividend yield of between 4% and 6% from one of the major ASX banks, for example. And usually on the upper end of that scale.
Today, only one of the big four banks offers a yield over 4%. And that is ANZ Group Holdings Ltd (ASX: ANZ). By contrast, Commonwealth Bank of Australia (ASX: CBA) is trading on a dividend yield of under 3%, which, until recently, was unheard of.
Something similar has happened with Telstra Group Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES), and Coles Group Ltd (ASX: COL) shares.
Even an ASX index fund like the Vanguard Australian Shares Index ETF (ASX: VAS) is trading on a dividend yield of about 3.15% right now – again, unusually low if we look to recent history.
What's even more unusual, though, is the yield one can get from not investing in ASX dividend shares at the moment. I've just checked the term deposit interest rates available on a 12-month account, and was quite startled by what I found. The top rate available right now is 4.25% (albeit not from one of the big four banks). That's 4.25% for a safe, guaranteed return (technically up to a $250,000 limit per deposit).
With this in mind, many investors might be asking themselves, 'What is the point of investing in ASX dividend shares right now?' particularly as it appears that we may have seen the last interest rate cut for a while.
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Does cash beat ASX dividend shares?
Cash, particularly with those sorts of interest rates, is a valid investment in its own right. Many retirees and investors who value capital preservation above all else might find a 4.25% term deposit perfectly adequate for their needs and goals. However, I still think most investors are better off with dividend shares, or at least using shares as part of a diversified income portfolio.
Why? Well, there are two reasons.
Firstly, ASX dividend shares are simply a better investment when it comes to tax. Income from a term deposit is usually taxed at one's full marginal rate, with little opportunity for deduction.
In contrast, many, if not most, ASX dividend shares attach franking credits to their dividend payouts. This reduces the tax liability on that income when tax time rolls around. As such, a 4.25% franked dividend yield will probably result in more cash in your pocket than a 4.25% term deposit interest rate.
Secondly, ASX shares have historically outperformed cash investments. It's not even close.
Remember, in addition to paying dividends, most shares tend to appreciate in value over time, thereby increasing your capital position. Combining this growth and income, shares have always outperformed cash over long periods of time. Back in August, Scott Phillips went through this disparity. As he found back then, ASX shares returned an average of 9.3% per annum between July 1995 and July 2025. Cash? Just 4.1% per annum.
That is the difference between turning a $10,000 investment into $143,796 and $33,677. Need we say more?
