Term deposits at 4.35% vs. ASX dividend shares: which one wins?

Cash is competitive again. Do shares still win?

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ASX dividend shares have an income competitor for the first time in years.

The Reserve Bank left the cash rate unchanged at 4.35% at its June meeting, following three increases since the start of the year.

That has pushed term deposit rates to levels Australian savers have not seen for some time.

Commonwealth Bank of Australia (ASX: CBA) is currently advertising a 12-month term deposit special of 5.25% per annum, with a standard 12-month rate of 4.75%.

Both are guaranteed, and deposits are protected up to $250,000 per person per institution.

So the following question is a fair one: Why own bank shares when the bank itself will pay you more for a term deposit?

Different Australian dollar notes in the palm of two hands, symbolising dividends.

Image source: Getty Images

The case against ASX dividend shares right now

On headline yield alone, cash wins comfortably.

Analysts expect CBA to pay a total dividend of $5.15 per share in FY26, which is equivalent to a forward yield of around 3% at the current share price.

FY27 forecasts of $5.45 per share imply about 3.2%.

A 5.25% term deposit beats both, with none of the volatility.

Term deposits also beat annual inflation, which the RBA recorded at 4.0% for the year to May.

Franking credits change the maths

The comparison is not quite complete, though.

CBA's dividends are fully franked, which means the company has already paid 30% tax on the profits behind them.

Grossing up a 3% cash yield produces an effective pre-tax yield of roughly 4.3%.

On the FY27 forecast, that rises to about 4.6%.

For an investor in a low- or zero-tax environment, such as a pension-phase superannuation fund, those credits are refundable in full.

However, a term deposit pays the same rate for the whole term and then rolls over to whatever rates exist at the time (reinvestment risk), which is a real risk if the RBA does begin cutting in 2027.

CBA, by contrast, has delivered a rising dividend every year since 2021, meaning your yield on cost can grow over time, which a term deposit cannot do.

CBA's most recent earnings

So what has been driving these dividend increases? To answer this question, it is worthwhile to look at the results.

CBA delivered cash net profit of $5,445 million in its FY26 half-year result, up 6% on the prior period.

The company lifted its interim dividend 4% to $2.35 per share, fully franked.

In contrast, the March quarter update was steadier. Cash net profit came in at around $2.7 billion, up 4% year on year but down 1% on the first-half quarterly average. Business lending grew 12.5%, household deposits rose 9.1%, and home lending increased 7.1%.

A $316 million loan impairment expense reflected what the bank described as heightened geopolitical and macroeconomic uncertainty.

Full-year results for CBA are due on 12 August.

Foolish takeaway: ASX dividend shares versus cash

If you need a known sum on a known date, the term deposit is the better instrument today.

But ASX dividend shares are not really competing on this year's yield.

They are competing on the next decade of dividend growth, franking credits and capital appreciation, all of which come with the very real risk of losing money along the way.

The choice investors make should be aligned with their risk appetite.

Motley Fool contributor Mark Verhoeven 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 no position in any of the stocks mentioned. 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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