hose with money in bank shares are reaping the rewards.

Falling share prices have pushed dividend income from all big four banks to an effective eight per cent or more, while average interest rates for online savings accounts are less than two per cent, and for term deposits they are about 2.5 per cent.

However, bank shareholders face extra risks such as the 20 per cent-plus slump in the value of their shares in recent months, and the potential for an economic slowdown to further weaken share prices.

AMP Capital chief economist and head of investment strategy Shane Oliver said the wide gap between deposits and share dividends highlighted the choices people had.

Low earnings ... Average interest rates for online savings accounts are less than two per cent, and for term deposits they are about 2.5 per cent. Picture: Supplied.Source:Supplied

“If they want high and relatively stable income flow, bank dividends are a better bet,” he said.

“But if they can’t tolerate volatility in the underlying investment, bank deposits are a better bet.”

Bank dividends have climbed strongly in recent years as profits climbed, but Dr Oliver said they were unlikely to grow at a similar pace in the year ahead.

“But I can’t see them cutting their dividends — you would have to have a recession, and that seems unlikely at the moment.”

Share dividends come with an attached franking credit worth 30c in the dollar, which at current prices pushes their income yield to between 7.9 per cent (Commonwealth Bank) and 9.1 per cent (ANZ).

In contrast, savings account interest rates have been falling for two years. A $5000, one-year term deposit at a major bank pays an average 2.52 per cent interest, while the base rate for online savings accounts averages 1.96 per cent, infochoice.com.au research found.

What is the better option? ... While Bank shares are paying out more money for those who can’t tolerate volatility in the underlying investment, bank deposits are a better bet. Picture: SuppliedSource:Supplied

InfoChoice spokeswoman Laura Crowden said bonus rates of more than 3 per cent were offered by some online accounts.

“There are still some institutions offering more than three per cent for a one-year term deposit, and higher rates are available if you are willing to lock your money away for a longer three or five-year period,” she said.

Statewide Super head of investments Con Michalakis said some investors were worried about whether the banks’ current dividend payouts would continue.

Tougher regulations for banks, a soft economy and the potential for lending to slow and bad debts to rise were among the concerns, he said.

“If the dividend is stable the shares are cheap. If the economy doesn’t go into a deep recession and nothing bad happens, it’s a really good risk to buy the banks.”

Mr Micahalakis said the outlook was tricky but he believed the fall in bank share prices had been overdone. “I think there is some reasonable value in bank shares.”

He said we were living in a low-interest world with not enough income, especially for retirees.

“Retirees may have to take on a little more risk, but not too much. It’s tough,” he said.

Most economists do not expect rises in savings account interest rates any time soon.

BIG FOUR COMPARISONS

Income With franking Credit

ANZ 6.37% 9.1%

NAB 6.33% 9.04%

Westpac 5.83% 8.3%

CBA 5.53% 7.9%

1-year term deposit 2.52% N/A

Online savings account 1.96% N/A

Source: Iress, infochoice.com.au (franking credits are 30c-in-the-dollar tax credits for company tax already paid)