Sharemarket dividends or bank savings? There's no contest
Savers dependent on fixed interest have been poorly advised for decades, not just over the past year as interest rates have tumbled. The dividend flow from a boring portfolio of industrial stocks trounces fixed interest and whatever the best daily rate might be from the online banks.
And right now, even after the market has rallied to start the year, equity yields slaughter the best term deposit rates you could have grabbed last year. Of course the yields aren't as tasty as they were in January or as extremely tasty as they were a year or two ago, but they're still fine in the general scheme of things.
As a rough and simplified demonstration using five stocks (not a recommendation), the BusinessDay share tables show Telstra last closed with a yield of 5.6 per cent, NAB 5.5, Westpac 5.2, Wesfarmers 4.1 and Woolworths 3.7 - an average of 4.8 per cent. Add the franking credits and the effective pre-tax yield is more than 6.7 per cent. Who wants term deposits?
Those who think they're risk averse or scarred after confusing trading with investing will no doubt wail at this point about shares perhaps falling in price - but for someone after an income stream, the price isn't the point - it's the sustainability of dividends and their potential to grow. The price will take care of itself eventually and the capital appreciates over history.
The sure thing about term deposits is that the capital is being steadily devalued and that the return from the dividends on Australian industrial stocks rapidly outpaces the best that the banks can offer. That's the key message financial commentator Peter Thornhill has been making in presentations over the past couple of decades. I've heard his story before, during and after the GFC and it has added up every time.
The search for yield has been the market's main theme over the past year and it's not over yet. The analysts suggesting bank shares had reached a bubble high last week don't seem to realise that.
Frequently Asked Questions about this Article…
According to the article, dividend yields from a simple portfolio of Australian industrial stocks currently outpace the best term deposit and online bank rates. Dividends (plus franking credits) can deliver a higher effective pre-tax yield, while term deposits face steady capital devaluation when interest rates fall.
The article used BusinessDay share tables showing Telstra at 5.6%, NAB 5.5%, Westpac 5.2%, Wesfarmers 4.1% and Woolworths 3.7%, which averages about 4.8% in dividend yield; with franking credits the effective pre-tax yield was said to be more than 6.7%.
The article notes that adding franking credits to dividend yields raises the effective pre-tax return, making equity income look significantly better than raw term deposit rates. In the example given, franking lifted the combined pre-tax yield above 6.7%.
The article argues retirees have often been poorly advised to rely solely on fixed interest and suggests dividend-paying industrial shares can provide much higher income. However, it frames this as an observation about yield advantages rather than a personalised recommendation—investors should consider dividend sustainability and their own risk tolerance before changing strategy.
The article acknowledges price volatility but points out that for income-focused investors the primary concern is dividend sustainability and potential dividend growth. It suggests price swings are less important for someone focused on a reliable income stream, and capital value tends to appreciate over the long term.
Yes. The article says recent RBA rate cuts have made many term deposits unattractive, forcing savers to realise those products are now poor performers compared with dividend yields from industrial shares.
The article states that the 'search for yield' has been the market's main theme over the past year and suggests that theme is still playing out, influencing investor demand for dividend-paying equities.
Financial commentator Peter Thornhill is mentioned as having made the case for dividend income over fixed interest for decades, and the author says Thornhill's message has consistently added up before, during and after the GFC.
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