Investors dump term deposits for yield stocks

The best term deposit rates are a little more than 4 per cent and the cash rate is at a record low.

The best term deposit rates are a little more than 4 per cent and the cash rate is at a record low. It's a far cry from the days when term deposit interest rates were more than 6 per cent.

Investors have been piling into the shares of the big banks and Telstra for their yields and that has contributed to the strong rises in their share prices. Those yields have come down, but are still attractive. Telstra's shares are on a dividend yield of more than 5.5 per cent. With the benefit of franking credits, Telstra shares have a grossed-up yield of more than 8 per cent, or about twice that of term deposits.

The shares of big banks are on grossed-up yields of between 7 and 9 per cent. The shares of Wesfarmers and Woolworths are on lower gross yields of about 6 per cent, but their share prices have also been driven sharply higher since the start of 2012 by investors chasing yield.

Investing in shares always entails risk and it is absurd to compare the risk of shares to term deposits on which the first $250,000 is covered by the government's deposit guarantee. But the risk of investing in these large, conservatively run companies is much less than that of investing in just about any other listed Australian company.

A lot of money is in term deposits and more of that is likely to be rotated from these when the deposits mature into the higher-yielding shares. Though the share prices in the higher-yielding stocks have been pushed more towards bubble territory, we are not there yet.

Telstra's position as the telecoms sector leader, and the oligopoly enjoyed by the big banks, makes them resilient businesses.

Most analysts think the shares of some of the big banks and Telstra could be slightly over-valued compared with earnings, perhaps by up to 10 or 15 per cent.

There are triggers that could cause their share prices to collapse, but it is hard to see how they could be pressed.

It would probably take sharply higher unemployment and a major downturn in property markets to do that. But low interest rates are good for economic growth and for corporate profits. Improved earnings of the higher yielders would help close any valuation gap.

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