ASX dividend shares can replace a term deposit if you buy them for income.
The income on offer from the bank is very low these days. It's not really a surprise considering how low the RBA interest rate is at just 0.25%.
If capital protection is your main focus then term deposits may still be the most appropriate choice. Investing in shares opens you up to the volatility of the share market. Shares can help overcome the long-term negative of inflation. Just be aware that share prices can go down sometimes.
Here are three ASX dividend shares that you could buy to replace the income of a term deposit:
Share 1: Rural Funds Group (ASX: RFF)
Rural Funds has a great business model to deliver good income and growth. It's a farmland landlord that aims to increase its distribution by 4% per annum. That's a decent growth rate for an ASX dividend share.
It can do that thanks to two main factors. The first reason is that rental indexation is built into its rental contracts. Rent is contracted to grow each year by a fixed 2.5% annual increase or grow by CPI inflation, plus market reviews.
The other helpful factor is that Rural Funds is re-investing around 20% of its adjusted funds from operations (AFFO) into productivity improvements at its farms for the tenant. This boosts the value of the farm and increases the rental income.
It's invested across a diverse farming portfolio of cattle, cotton, macadamias, almonds and vineyards. It currently has a forecast FY21 distribution yield of 5.7%. I think that's a solid starting yield for an ASX dividend share.
Share 2: Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
I believe Soul Patts is one of the best ASX dividend shares. It has paid a dividend every year since it started in 1903. Soul Patts has also grown its dividend every year since 2000. It currently has a grossed-up dividend yield of around 4.4%
Soul Patts owns a diversified portfolio of listed and unlisted businesses. Each year Soul Patts receives a stream of investment income from its holdings. After paying for operating costs, Soul Patts then pays out most of the net cashflow to shareholders. In FY19 it retained about 20% of its net cashflow to re-invest for more opportunities to grow the cashflow and dividend in future years.
The ASX dividend share is invested in ASX businesses like TPG Telecom Ltd (ASX: TPM), Brickworks Limited (ASX: BKW), Australian Pharmaceutical Industries Ltd (ASX: API), Milton Corporation Limited (ASX: MLT) and Clover Corporation Limited (ASX: CLV).
Share 3: Whitefield Limited (ASX: WHF)
Whitefield is one of the oldest listed investment companies (LICs) on the ASX. It was founded in 1923.
Its portfolio is largely focused on ASX blue chips. Some of its biggest holdings are CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA), Wesfarmers Ltd (ASX: WES), Woolworths Group Ltd (ASX: WOW), Macquarie Group Ltd (ASX: MQG) and APA Group (ASX: APA).
It has a higher focus on 'industrial' businesses and aims to outperform the S&P/ASX 200 Industrials Accumulation Index over rolling 5-year periods.
The ASX dividend share has a very reliable record over the last 25 years, with no dividend cuts. It's not guaranteed that the dividend won't be cut in the future. However, I think it's a good sign that the company has maintained the dividend even during times like the GFC.
One of the other attractive things about Whitefield is its reasonably low operating cost. According to Whitefield, its operating expense ratio is approximately 0.40% of gross assets.
It currently has a grossed-up dividend yield of 6.5%.
Foolish takeaway
Each of these ASX dividend shares have solid dividend records and attractive starting yields. If I had to start with one it would be Soul Patts because of its consistent dividend growth and diversification.
