# Shares vs. bank deposit



## Tyler Durden (28 December 2010)

Hey all, I'm a bit of a newbie and have plans to invest for the long term, but just wanted opinions on my plans.

The way I see it is, if I have $1,000, it is better to put that into a blue chip company to earn a 5% dividend rather than putting it into a bank account to earn 5% interest, because the company dividends are 100% franked (the ones I choose anyway), whereas my interest will be taxed.

Is this line of thinking right? I guess I am just after confirmation that even a 5% dividend yield (fully franked) is better than the going deposit interest rates with banks.


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## Gunlom (28 December 2010)

yes it is better cash return, however you are risking the original $1000 to capital loss.

That is why you will get a higher return from shares. The $1000 in bank will always be $1000. But the $1000 in shares may become $1200 or $500, or any amount including $0.

It all comes down to what you plan from the money, if you need it back in a year, then bank is way to go, if you want it back in 10 years shares are the way to go.


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## Julia (28 December 2010)

Tyler Durden said:


> The way I see it is, if I have $1,000, it is better to put that into a blue chip company to earn a 5% dividend rather than putting it into a bank account to earn 5% interest, because the company dividends are 100% franked (the ones I choose anyway), whereas my interest will be taxed.



Remember that you still pay tax on the dividend income, just in case you're thinking you get the franking on untaxed income.



> Is this line of thinking right? I guess I am just after confirmation that even a 5% dividend yield (fully franked) is better than the going deposit interest rates with banks.




It has already been pointed out that you can experience capital loss with shares.
Maybe ask yourself how you will feel if your capital is worth 20% less at the end of a year if the share price falls?

You need to take into account not only your own personal situation but the overall economic conditions, what effects potential political uncertainty might have on some stocks, how they are affected by the $A, etc etc.


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## Calliope (28 December 2010)

Tyler Durden said:


> Hey all, *I'm a bit of a newbie* and have plans to invest for the long term, but just wanted opinions on my plans.




Who are you kidding?

http://www.zerohedge.com/article/credit-suisse-gold-supply-and-demand-forecast


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## Tyler Durden (29 December 2010)

Gunlom said:


> yes it is better cash return, however you are risking the original $1000 to capital loss.
> 
> That is why you will get a higher return from shares. The $1000 in bank will always be $1000. But the $1000 in shares may become $1200 or $500, or any amount including $0.
> 
> It all comes down to what you plan from the money, if you need it back in a year, then bank is way to go, if you want it back in 10 years shares are the way to go.




Thanks. But I suppose due to inflation, the $1000 in the bank may lose its value anyway?



Julia said:


> Remember that you still pay tax on the dividend income, just in case you're thinking you get the franking on untaxed income.




I'm not sure what you mean? Let's assume my personal income tax rate is 30%, so if I get fully franked dividends, then I don't have to pay tax on those dividends right? And if I am in the 50% tax bracket, then I still have to pay some tax on my fully franked dividends but not as much?



Calliope said:


> Who are you kidding?
> 
> http://www.zerohedge.com/article/credit-suisse-gold-supply-and-demand-forecast




lol, Tyler Durden is a character from the movie Fight Club, so I'm not surprised this name has been used before


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## So_Cynical (29 December 2010)

Tyler Durden said:


> Hey all, I'm a bit of a newbie and have plans to invest for the long term, but just wanted opinions on my plans.
> 
> The way I see it is, if I have $1,000, it is better to put that into a blue chip company to earn a 5% dividend rather than putting it into a bank account to earn 5% interest, because the company dividends are 100% franked (the ones I choose anyway), whereas my interest will be taxed.
> 
> Is this line of thinking right? I guess I am just after confirmation that even a 5% dividend yield (fully franked) is better than the going deposit interest rates with banks.




You also mite want to consider this or something similar.

https://www.aussiestockforums.com/forums/showthread.php?t=20999


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## skc (29 December 2010)

Tyler Durden said:


> lol, Tyler Durden is a character from the movie Fight Club, so I'm not surprised this name has been used before






Calliope said:


> Who are you kidding?
> 
> http://www.zerohedge.com/article/credit-suisse-gold-supply-and-demand-forecast




LOL. Did you also think his picture looked very much like Brad Pitt? 

Fight Club is one of my favourite movies and is one of the earlier movies that played with the idea of ------- (I've decided not to give it away, but highly recommend you watch it for yourself).



Tyler Durden said:


> Thanks. But I suppose due to inflation, the $1000 in the bank may lose its value anyway?
> 
> I'm not sure what you mean? Let's assume my personal income tax rate is 30%, so if I get fully franked dividends, then I don't have to pay tax on those dividends right? And if I am in the 50% tax bracket, then I still have to pay some tax on my fully franked dividends but not as much?




Forget about inflation. The effect of inflation on your $1000 deposite vs $1000 share investment is the same, all else being equal.

Let's say you get 70c dividend fully franked (i.e. 30c franking credit) - so the gross up dividend is $1. Your tax bracket is 30%, you pocket the 70c dividend in full. If your tax bracket is 50% (which no longer exist btw), you pocket 50c.


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## Julia (29 December 2010)

Tyler Durden said:


> And if I am in the 50% tax bracket, then I still have to pay some tax on my fully franked dividends but not as much?



Yes.


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## qe2infinity (5 January 2011)

Tyler Durden said:


> Hey all, I'm a bit of a newbie and have plans to invest for the long term, but just wanted opinions on my plans.
> 
> The way I see it is, if I have $1,000, it is better to put that into a blue chip company to earn a 5% dividend rather than putting it into a bank account to earn 5% interest, because the company dividends are 100% franked (the ones I choose anyway), whereas my interest will be taxed.
> 
> Is this line of thinking right? I guess I am just after confirmation that even a 5% dividend yield (fully franked) is better than the going deposit interest rates with banks.




i think it's the right line of thinking, Tyler Durden. however, the benefit of the franking credit from full franked dividends really depends on which tax bracket you are in. 

also, holding onto shares for longer than 1 year means any capital gains you make are only taxed on 50% of the profits. then again, stock selection is imperative. 

but yes, it is much more dynamic to have your $1000 in the share market as your money is working for you and even though your returns aren't guaranteed, if you make more than 5-6% p.a, then it is MUCH more worthwhile. 

disclaimer: please DYOR.


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## Tysonboss1 (5 January 2011)

skc said:


> Forget about inflation. The effect of inflation on your $1000 deposite vs $1000 share investment is the same, all else being equal.




Not really the underlying asset of a bank account is cash so it will suffer inflation losses.

The underlying asset of a share is a real business with real assets, the value of these assets should rise inline with inflation.


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## nioka (5 January 2011)

Tysonboss1 said:


> Not really the underlying asset of a bank account is cash so it will suffer inflation losses.
> 
> The underlying asset of a share is a real business with real assets, the value of these assets should rise inline with inflation.




Exactly.....
 plus your footnote
 "A stock is more than just a ticker symbol whose price bounces around, it represents a real company that has a value that does not depend on it's share price".

Then add the fact that you can research with stocks to find those that will return better than the average.

Means " No contest". Stocks win hands down.


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## Tysonboss1 (5 January 2011)

So_Cynical said:


> You also mite want to consider this or something similar.
> 
> https://www.aussiestockforums.com/forums/showthread.php?t=20999




Good Advice,

As Graham points out one of the virtues of the share market is that even a novice defensive investor can earn a satisfactory result from his investing over time by simply making regular contributions to a low cost index fund.

It's a great place to start while you focus on learning the the ins and out of investing (rather than speculating). 

Graham actually recommends this path for 90% of investors.

One important thing is to keep your contributions regular, Don't stop contributing because the market falls and don't increase contributions because the market has risen. just regularly add 10% - 20% of your weekly earnings over as long a savings period as you can.


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## Tonester (6 January 2011)

qe2infinity said:


> also, holding onto shares for longer than 1 year means any capital gains you make are only taxed on 50% of the profits.




I believe the government is still going ahead with a 50% discount on interest earned, when under $1000.  Something to consider.


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## Tysonboss1 (7 January 2011)

Tonester said:


> I believe the government is still going ahead with a 50% discount on interest earned, when under $1000.  Something to consider.




That should help a bit,

But remember that you still earn interest every year and will be taxed every year. your capital gain can compound for many years before it is taxed just once.


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## Judd (7 January 2011)

Tyler Durden said:


> Hey all, I'm a bit of a newbie and have plans to invest for the long term, but just wanted opinions on my plans.




All good fortune to you and I hope everything goes well.  No matter what you do always be aware of the Dunning-Kruger effect.


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