ASX dividend shares have spent a decade winning the argument that they could yield more than cash. But that is no longer quite true.
Commonwealth Bank (ASX: CBA) is advertising a 12-month term deposit special of 5.15%, whilst Australia's 10-year government bond yield reached around 5.19% on Tuesday, its highest level in 15 years.
The Reserve Bank has held the cash rate at 4.35% since May.
Suddenly, doing nothing pays something.
What cash actually pays right now
CommBank's standard 12-month rate is 4.75%, with a 5.15% special offer available for a limited time.
Shorter terms pay considerably less, at 3.30% for three months and 3.45% for six.
In contrast, Betashares Australian High Interest Cash ETF (ASX: AAA) is the listed alternative.
The ETF holds nothing but deposits with banks, including National Australia Bank (ASX: NAB), Bank of Queensland (ASX: BOQ) and Rabobank, charges 0.18% a year, and currently offers a cash yield net of fees of 4.43%.
Income is paid monthly, and the fund holds roughly $4.9 billion.
The trade-off is a slightly lower rate in exchange for never locking your money away.
What ASX dividend shares pay after tax
This is where the comparison gets interesting.
Vanguard Australian Shares High Yield ETF (ASX: VHY) holds 92 companies led by the major banks and BHP.
Vanguard forecasts a yield of 4.2%, rising to 5.5% once franking credits are counted.
Units closed Monday at $85.61.
On the headline number, the term deposit wins comfortably.
A rate of 5.15% beats 4.2%, and it does so without any chance of losing your capital.
Franking is the thing that changes the maths.
Consider an investor on a 39% marginal rate including the Medicare levy.
The term deposit returns roughly 3.14% after tax.
VHY delivers about 3.36%, because franking credits offset most of the tax on the grossed-up income.
In pension phase, where those credits are fully refundable, VHY returns 5.5% against the term deposit's 5.15%.
Why the margin is thinner than it looks
Two or three tenths of a percentage point is not much reward for taking equity risk.
A term deposit cannot fall in value, but VHY certainly can.
The fund is also heavily concentrated in banks and resources, which are the sectors most exposed to a rate rise.
ANZ Group Holdings Ltd (ASX: ANZ) now expects the Reserve Bank to lift the cash rate to 4.60% in November, and a higher cash rate would push term deposit offers higher again.
The real case for ASX dividend shares
Yield is the wrong reason to own ASX dividend shares at these rates.
Instead, growth is the right reason.
A term deposit pays 5.15% this year and an unknown number next year, but it will never pay you more than the rate you agreed to on the day you signed.
A dividend from a growing business rises over time, and the capital behind it can rise with it.
APA Group (ASX: APA) has now raised its distribution for 22 consecutive years, which no deposit product on earth can match.
Foolish takeaway
If you need the money within two years, take the term deposit.
The certainty is worth more than two tenths of a percentage point.
If you are investing for a decade or more, ASX dividend shares still make more sense, though for reasons that have nothing to do with beating cash this year.
The underlying truth is that cash has become a genuine competitor again.
The post Term deposits are paying more than ever. Are ASX dividend shares still worth it? appeared first on The Motley Fool Australia.
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 positions in and has recommended Apa Group. 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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