The return of cash as an income yielding asset has transformed the investment landscape. For so long the ugly duckling, cash now provides serious competition for every other asset. Stocks, bonds, hybrids, and other assets all need to justify why investors should pay a premium for them versus the safety of cash. That’s especially the case for investors searching for steady income.

Let’s look at the pros and cons of different assets for those seeking regular income, from the lowest yielding to those offering better yields.

Bank savings/money market funds

Bank savings accounts don’t yield much, especially at the major banks. Outside of that, it gets better but often with lots of strings attached.

An alternative is ‘cash’ ETFs. These ETFs can get you a higher yield and good liquidity. The main choices are as follows:

• AAA (ASX: AAA) is the market leader and offers the best liquidity and tightest spreads. It's become a popular place to leave cash with better rates than bank saving deposits. However, it's also the most expensive on fees, making the others more attractive if money can be left in cash for a while.
• ISEC carries more risk than the others as it can hold up to 20% in floating rate notes.

Term deposits

Investors have been pouring money into term deposits and for good reason. They’re an attractive option for many investors seeking income. The good news is that banks have improved their offers to attract more depositors. Even the major banks have upped their game:

• Commonwealth Bank: 5.05% p.a. for 12-23 months
• ANZ: 5.05% p.a. for 12-24 months
• Westpac: 5.10% p.a. for 12-23 months
• NAB: 5% p.a. for 12 months
• ING: 5.3% p.a. for 12 months
• Judo Bank: 5.25% p.a. for 12 months

Things to keep in mind:

• Know the difference between interest paid at maturity vs. monthly.
• Understand early withdrawal penalties.
• Read the terms and conditions carefully.

The downside: current term deposits still trail the inflation rate of 5.4%, which means a real loss in purchasing power.

Bonds

Bonds have had a tough few years, though that could mean better value now. Government bonds are considered risk-free and are currently yielding 4.48% in Australia. Bond funds may offer more than 5% yields, and corporate bonds range from 5.75% to 6.5%.

Recommended ETFs:

• VAF (ASX:VAF): 4.95% yield
• IAF (ASX:IAF): 5.91% yield

High-yield examples:

• Commercial mortgage/private debt: 10–12%
• Insurance-linked bonds: up to 15% (high risk)

Bonds may rise in value if yields fall in a slowdown, offering both income and capital gains — unlike cash. But inflation is a key risk to bond performance.

Stocks

The ASX 200 trades at a trailing earnings yield of 5.81%, which isn’t particularly cheap relative to bonds. The average dividend yield is 4.44%, or 6.34% grossed up.

Top income stocks include:

• Major banks: yields from 4.35% (CBA) to 6.4% (ANZ)
• Transurban (ASX:TCL): 4.47% yield
• Coles (ASX:COL): 4.32% yield

Commodity stocks offer high dividends but often lack consistency.

Dividend ETFs

These offer broad exposure to income stocks. Top ETFs include:

• VHY (ASX:VHY) – Vanguard’s high-yield ETF
• SYI (ASX:SYI) – State Street’s high-yield ETF

Considerations:

• Differing methodologies and portfolio compositions
• Franking credits vary and may not be fully passed through
• Yields depend on earnings and may fluctuate

Grossed-up yields of 7–9% are possible but come with volatility risks.

Listed investment companies (LICs)

LICs can smooth out dividends over time. Some top LICs include:

• AFI (ASX:AFI)
• Argo (ASX:ARG)
• Whitefield (ASX:WHF)
• Washington H. Soul Pattinson (ASX:SOL) – a private investment company, not technically an LIC

Downside: many LICs trade at persistent discounts to NAV due to fees and investor sentiment.

Hybrids

Bank hybrids offer 6–8% yields and combine features of equity and debt. But they come with notable risks:

• APRA’s review may increase investor risk by clarifying distribution can be missed
• Hybrids are untested in a major downturn

Other assets and issues

This article covers the main income-producing assets. It does not go into tax considerations or specific needs for SMSFs and retirees — topics for a future article.