Rising interest rates have made term deposits more attractive again.
Right now, a standard five-year term deposit from Commonwealth Bank of Australia (ASX: CBA) is offering around 4%. That is the best level savers have seen for quite some time and may appeal to those looking for certainty.
However, when you factor in inflation, the real return looks far less compelling.
Inflation is still eating into returns
This week, the Australian Bureau of Statistics revealed that inflation rose 3.7% over the 12 months to February 2026.
That means a 4% term deposit is only just keeping pace with rising prices. In real terms, investors are barely growing their wealth.
For those who are highly risk averse, this trade-off may be acceptable. But for investors willing to take on some volatility, there may be better options available.
ASX dividend shares can offer more income
One of the key advantages of ASX dividend shares is their ability to deliver higher income yields.
Many established companies on the ASX offer dividend yields above 4%, with some comfortably exceeding this level depending on market conditions.
In addition, these dividends can grow over time as company earnings increase. This provides a level of income growth that term deposits simply cannot match.
ETFs make diversification easy
For those who prefer not to pick individual ASX dividend shares, the Vanguard Australian Shares High Yield ETF (ASX: VHY) offers a simple alternative.
This fund provides exposure to a broad portfolio of high-yielding ASX shares, helping to spread risk across multiple companies and sectors.
It has historically delivered a yield above 4%, making it competitive with term deposits from an income perspective.
But the key difference is total return.
Over the past five years, the ETF has generated a total return of 13.45% per annum. While there is no guarantee this will continue, it highlights the potential for both income and capital growth.
Capital growth makes the difference
The biggest advantage ASX dividend shares have over term deposits is the potential for capital appreciation.
While a term deposit will return your original capital plus interest, ASX shares can increase in value over time as businesses grow.
This means investors are not just relying on income. They also benefit from rising share prices, which can significantly boost long-term returns.
For investors focused on building wealth while generating income, this combination can make ASX dividend shares a more compelling option than term deposits.
The post Why ASX dividend shares could still be better than term deposits appeared first on The Motley Fool Australia.
Motley Fool contributor James Mickleboro 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 recommended Vanguard Australian Shares High Yield ETF. 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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