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 income from a conservative portfolio of Australian industrial stocks typically outpaces the returns from term deposits and online bank savings. The Reserve Bank’s rate cuts have exposed many term deposits as low-yielding, making dividends a more attractive income option for self-funded retirees — provided you focus on dividend sustainability rather than short-term share price moves.
The article gives a simplified example using five stocks (not a recommendation): Telstra 5.6%, NAB 5.5%, Westpac 5.2%, Wesfarmers 4.1% and Woolworths 3.7%, which averages about 4.8% dividend yield. When you add franking credits the effective pre-tax yield in that example rises to more than 6.7%, well above typical term deposit returns cited in the piece.
Fanking credits attach to Australian franked dividends and can boost the effective pre-tax return from a share portfolio. In the article’s five-stock example, adding franking credits increased the effective pre-tax yield from the raw dividend average (4.8%) to over 6.7%, showing how franking can meaningfully lift income for Australian investors.
The article acknowledges share-price volatility, but explains that for income-focused investors the priority is the sustainability and growth potential of dividends, not short-term price moves. Over time the author argues capital tends to appreciate and dividends provide the ongoing income stream retirees often need.
The article suggests retirees shouldn’t simply curse the RBA — rate cuts have highlighted how poor many term deposits are and arguably pushed income-seeking investors to consider dividend-paying shares that offer higher yields than fixed interest products.
The piece notes some analysts recently suggested bank shares had reached a bubble high, but it also points out the market’s strong ‘search for yield’ over the past year, implying demand for high-yield equities (including banks) may be driving valuations and that views on bubbles can vary.
The ‘search for yield’ refers to investors moving into higher-yielding assets as traditional fixed-interest returns fall. The article says this has been the market’s main theme over the past year and helps explain why dividend-paying industrial stocks have become more attractive relative to term deposits and bank savings.
The article recommends focusing on the sustainability and potential growth of dividends rather than short-term share prices. Look for companies with reliable, historically consistent payouts (the article uses large industrial names as examples) and remember the example given was illustrative, not investment advice.
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