We find ourselves in a rather strange age when it comes to investing in the share market in 2026. Shares are high – we are, as of yesterday's close, about 3% away from February's all-time high of 9,200.0 points on the S&P/ASX 200 Index (ASX: XJO). Normally, when share prices are high, dividend yields are low.
That is arguably the case today too. None of the big four ASX banks is currently offering dividend yields above 5%, which is unusual for our market. Similarly, the yields on popular income stocks like Telstra Group Ltd (ASX: TLS), Coles Group Ltd (ASX: COL) and Wesfarmers Ltd (ASX: WES) are all currently under 4%. Again, a rather unusual occurrence by the ASX's historical standards.
However, what is also unusual is that interest rates are also high in a time of stock market opulence. Traditional financial logic dictates that share prices should fall if interest rates rise. Yet, despite the Reserve Bank of Australia (RBA) hiking the cash rate three times in 2026 to date, investors haven't seemed to notice.
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Interest rates and dividend yields
These hikes, and a cash rate of 4.35% that, until 2024, hadn't been seen since 2011, are painful for anyone with a loan or mortgage. However, they cut both ways, as many things do. Savers can now enjoy a risk-free rate of return well above 5% if they shop around for the most competitive term deposits and savings accounts.
I say risk-free because the government still guarantees any deposit at any authorised deposit-taking institution up to $250,000.
As investors should know, shares are not risk-free. No one is guaranteeing your capital, or your income, if you buy an ASX share. There is a chance an investment can go to zero. You also have no control of a share's price. You may not be able to sell your shares.
Under traditional financial circumstances, this risk would result in a higher yield from shares than from cash. But we don't appear to be living in traditional financial circumstances.
That brings us to an important question: Is a 5% risk-free term deposit a superior investment to a 4%-yielding dividend share?
Well, again, like many things, there is no simple answer to this question.
If an investor, perhaps a retiree, values capital protection above all else, then a safe, risk-free 5% yield is arguably the right choice for them. It's not too often that we have seen the chance to bag that kind of yield from a risk-free investment in recent years.
However, cash investments offer no opportunity for capital growth. Shares do. Plus, decades of historical data show that shares have always been a better wealth-building asset than cash, even during times of high interest rates.
Shares of high-quality companies also tend to increase their dividends over time, and at above-inflation rates. That's also something a term deposit cannot match.
Don't forget about the franking
There is one more advantage that shares offer over term deposits. That would be the possibility of franking credits. Most shares attach franking credits to their dividend payments, in recognition of corporate tax paid in Australia.
This has the effect of reducing the tax liable on that dividend as income, indirectly raising its real yield. We refer to this benefit as a 'grossed-up yield' if it includes the value of these franking credits. To illustrate, a dividend stock yielding 4% and offering full franking actually has a grossed-up yield of 5.7%. As such, a reliable fully franked 4% dividend yield is superior to a 5% yield from a term deposit.
Everyone's circumstances are different, and as such, there is not a single answer to whether a 4% (franked or unfranked) dividend yield is a better choice against a 5% term deposit. Weigh up your own goals and risk tolerances, and decide for yourself. There may be no right answer for everyone, but there is also no wrong answer.
