ASX Dividend Shares or Term Deposits? Here’s Why These 5 ASX Shares Make More Sense Right Now

ASX Dividend Shares or Term Deposits – what is the better way for investors to grow their wealth? Historically, term deposits have been the answer for cautious Australians, offering guaranteed returns with minimal risk. However, in the current economic landscape, marked by shifting interest rates and evolving market dynamics, certain ASX dividend shares are proving to be a compelling alternative to traditional term deposits.

We believe that the recent rate cuts by the Reserve Bank of Australia (RBA) have dramatically altered the investment landscape. While term deposits remain a safe harbour, their appeal has diminished given the paltry returns on offer. Conversely, a carefully selected portfolio of dividend-paying shares offers not only attractive income streams but also the potential for capital growth, providing investors with a more rewarding risk-return profile.

This article explores five ASX dividend shares that make more sense than term deposits right now. We’re not just talking about any stocks; we’re referring to companies with proven track records of delivering reliable dividends, resilience in market downturns, and solid fundamentals to weather economic uncertainties. What are these companies, and why might they be a smarter move than locking your money away in a term deposit? Let’s dive in.

 

The Current Interest Rate Environment and What It Means for Investors

The RBA recently cut the cash rate to 3.85 per cent, continuing a downward trajectory from the high of 4.1 per cent earlier this year. Interest rate cuts typically reduce returns from fixed-income products like term deposits, often driving investors to seek alternative sources of income.

It is important to note that the rate cuts have a nuanced impact on sectors like banking. While lower rates can squeeze net interest margins (NIMs) and potentially hurt bank profits, they also tend to stimulate borrowing and economic activity. In turn, this can support business earnings and market valuations.

For investors asking, “What are the best income-generating investments in this environment?” dividend-paying shares with solid fundamentals and defensive characteristics stand out. While banks might face margin pressure, other sectors, especially those linked to infrastructure, property, and consumer staples, can offer stable dividends and growth opportunities.

 

Why Dividend Shares Can Outperform Term Deposits in Today’s Market

At face value, term deposits offer guaranteed returns, which seem attractive in uncertain markets. But with the RBA’s cuts, the returns on term deposits have shrunk to around 4.5 per cent per annum or less for many products. After inflation and tax, real returns are often negligible or negative.

Dividend shares, especially those from well-established companies with consistent payout histories, can provide higher yields, often in the 5 to 7 per cent range, and the possibility of capital appreciation. Plus, franked dividends add an extra layer of tax efficiency for Australian investors, improving net income compared to term deposit interest, which is fully taxable.

In our view, investors who want income but also some capital growth should seriously consider dividend shares rather than locking into low-yielding term deposits. What are some of the best dividend shares on the ASX right now? Let’s look at five stocks that offer compelling value.

 

Commonwealth Bank of Australia (ASX: CBA)

Commonwealth Bank is Australia’s largest bank by market capitalisation and one of the “big four” banks that dominate the country’s financial landscape. Its operations span retail, business, and institutional banking, along with wealth management services. Despite ongoing headwinds from recent RBA rate cuts, CBA continues to demonstrate remarkable resilience.

While it is true that rate cuts compress the net interest margin (NIM), the difference between what banks earn on loans versus what they pay on deposits, CBA benefits from its sheer scale and diversified revenue streams, including growing fee-based income. Additionally, lower interest rates often stimulate borrowing, which can increase lending volumes and partially offset margin pressures.

From an investor’s standpoint, CBA’s dividend yield currently stands at approximately 2.79 per cent, supported by a strong balance sheet and prudent capital management. But more importantly, the bank has consistently paid out over A$4.50 per share in dividends over the last 2 years. The bank has a history of maintaining steady or growing dividends even during challenging economic cycles. Moreover, the fully franked nature of these dividends enhances after-tax returns for Australian investors.

Compared to term deposits, CBA offers not just income but also the potential for capital appreciation should the bank execute well in a recovering economy. The bank’s share price has demonstrated relative stability over recent volatility, and its market leadership means it is likely to remain a core holding for income-focused portfolios.

 

Transurban (ASX: TCL)

Transurban is a leading owner and operator of toll roads in Australia and North America, with assets that include major motorways and urban expressways. The company’s business model is based on long-term concession agreements that provide relatively predictable cash flows, often indexed to inflation or with scheduled toll increases.

This inflation linkage is a crucial advantage right now. With inflation remaining a concern globally, infrastructure assets like Transurban’s toll roads tend to benefit from rising prices, which can help maintain or grow distributions over time. Its dividend yield currently stands at approximately 4.29 per cent, offering a compelling income stream compared to low fixed-term deposit returns.

Furthermore, Transurban’s revenue depends on traffic volumes, which are rebounding as economic activity normalises post-pandemic. The company invests heavily in upgrading its infrastructure to support increasing urban populations and vehicle usage.

For investors tired of the limited returns from term deposits, Transurban offers a way to participate in stable, inflation-protected income, plus the potential for capital gains as its assets appreciate. While shares come with market risk, the company’s strong cash flow coverage for dividends makes its distributions more secure than many alternatives.

 

Telstra Corporation (ASX: TLS)

Telstra is Australia’s largest telecommunications provider, controlling a vast network infrastructure including mobile, fixed line, and broadband services. Despite facing competitive pressures from emerging players and technological shifts, Telstra has successfully pivoted towards 5G and enhanced digital services, positioning itself for future growth.

The company currently offers a dividend yield of around 4.2 per cent, often fully franked, which remains higher than term deposit rates after tax. This yield is supported by steady operating cash flows and a commitment to returning capital to shareholders.

Telstra’s customer base is relatively sticky due to contract arrangements, which provides a stable revenue foundation. Its strategic investments in network upgrades and expansion of digital platforms are expected to drive earnings growth over the medium term.

What makes Telstra particularly attractive right now is its defensive nature. Telecom services are essential, meaning demand is less sensitive to economic downturns or interest rate fluctuations compared to sectors like finance or discretionary retail. This stability, combined with an attractive yield and franking credits, positions Telstra as a top candidate for investors seeking income beyond what term deposits can offer.

 

Goodman Group (ASX: GMG)

Goodman Group is a global logistics property group that owns, develops, and manages industrial warehouses and business parks. It caters primarily to e-commerce, manufacturing, and distribution sectors, all areas experiencing strong demand amid changing consumer behaviours and supply chain dynamics.

Goodman’s dividend yield is approximately 0.98 per cent, but the total return potential is amplified by capital growth driven by property appreciation. Unlike term deposits, Goodman offers exposure to real assets that tend to increase in value over time, especially given the current scarcity of prime industrial real estate.

Its portfolio is geographically diversified across Australia, Asia, Europe, and North America, which reduces the risk of localised economic downturns impacting its income streams. Lease agreements are often long-term, with rental escalations tied to inflation, which further supports steady distributions.

For investors questioning whether property trusts can outperform term deposits, Goodman represents a blend of income and growth potential, offering resilience in a low-interest environment and exposure to sectors benefiting from structural economic shifts.

 

Wesfarmers (ASX: WES)

Wesfarmers is one of Australia’s largest conglomerates, with interests spanning retail (including Bunnings, Kmart, and Officeworks), industrial supplies, chemicals, and resources. This diversity allows it to smooth out earnings volatility and maintain consistent cash flows, which underpin its dividend payouts.

Wesfarmers Ltd has a current dividend yield of approximately 2.5 per cent, which is near a 10-year low, though its strong portfolio still makes it a long-term contender. The company has a history of dividend growth, reflecting strong management and steady business performance.

Its retail brands, particularly Bunnings, are considered defensive; they tend to perform well even during economic slowdowns due to consumer demand for home improvement and essentials. Wesfarmers also benefits from cost control and operational efficiency programs that boost margins.

Investors looking for stable dividend income with the possibility of capital gains often find Wesfarmers attractive compared to term deposits. Its shares offer a way to participate in a diversified portfolio of Australian businesses, which is less sensitive to interest rate cuts than banking shares.

 

What Are the Risks?

Of course, dividend shares come with risk. Share prices can fluctuate due to market conditions, company performance, or broader economic factors. Dividend cuts are possible, especially if a company faces financial stress.

However, the five stocks discussed have strong balance sheets, consistent earnings, and resilient business models. We believe their dividends are sustainable, and the potential for capital growth makes them a more rewarding investment choice than term deposits in the current climate.

 

How to Approach Dividend Investing Now

Investors considering dividend shares over term deposits should:

• Diversify across sectors to reduce risk.
• Focus on quality companies with strong cash flow and a history of stable or growing dividends.
• Consider franking credits, which can improve after-tax returns.
• Review regularly to ensure the companies maintain strong fundamentals.

 

Conclusion

We believe that in today’s low-rate environment, locking funds into term deposits might not deliver the income or growth investors desire. These five ASX dividend shares offer a more compelling proposition, blending reliable income with the potential for capital appreciation.

Are you ready to reconsider your portfolio? Rather than settling for a stagnant return, exploring dividend shares such as Commonwealth Bank, Transurban, Telstra, Goodman Group, and Wesfarmers might deliver the financial outcomes you seek. What are the risks? Certainly, but with careful selection and monitoring, the rewards could be significant.

 

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips

FAQs

• Are dividend shares safer than term deposits?

  Dividend shares carry more risk than term deposits because share prices can fluctuate. However, they offer higher income potential and capital growth opportunities. Term deposits are safer but currently provide lower real returns.

• How do franking credits affect dividend returns?

  Franking credits represent tax paid at the company level, which Australian investors can use to offset their tax liabilities. This can significantly enhance the after-tax yield on dividends compared to interest from term deposits, which is fully taxable.

• Will bank dividends suffer with further rate cuts?

  Banks may face margin pressure from rate cuts, but increased lending volumes and diversified income streams can mitigate this. Quality banks like CBA have proven resilient, maintaining dividends through economic cycles.

• Can I lose money investing in dividend shares?

  Yes, share prices can fall, impacting the value of your investment. However, focusing on blue-chip, dividend-paying stocks with strong fundamentals can reduce this risk.

• How much should I allocate to dividend shares versus term deposits?

  Allocation depends on your risk tolerance and income needs. We believe a balanced approach, leveraging dividend shares for higher income and some term deposits for security, makes sense in the current environment.