Term deposits are great, but I believe there are ASX dividend shares that could be better picks for passive income.
Don't get me wrong, it's a good idea to have some cash (earning interest), and term deposits are very good at protecting capital. For investors who don't want any volatility in their capital, then the share market may not be the best place to invest.
However, there are two reasons why term deposits wouldn't be my first choice for passive income. First, they don't offer growth potential. There is no capital growth possibility, and the income is fixed, too.
Second, I think it's becoming more likely that interest rates may be reduced in 2025 with inflation seemingly tamed – this could reduce the attractiveness of term deposit returns.
With that in mind, I'm going to talk about two ASX dividend shares with high yields and stable businesses that could make better passive income picks.
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APA Group (ASX: APA)
APA is one of the largest energy infrastructure businesses in Australia. It has a huge national gas pipeline across the country, transporting half of the country's usage. APA also owns gas processing facilities, storage facilities, and gas-powered energy generation. It has investments in solar farms, wind farms, and electricity transmission.
The business plays an important role in Australia's energy market and generates good cash flow from it. The Australian government believes that gas will play its part in the national energy mix for decades, which underlines the importance of APA's assets. It continues to invest in new energy assets, unlocking more cash flow for the business.
Pleasingly, a large majority of the ASX dividend share's revenue is linked to inflation, so it is somewhat protected from the inflation we're seeing.
APA has grown its annual distribution every year since 2004, and I think it can keep increasing its payout in the foreseeable future.
The FY24 guided distribution of 56 cents per security (up 1.8% year over year) translates into a forward distribution yield of 7.1%.
Telstra Group Ltd (ASX: TLS)
Telstra is Australia's biggest telecommunications business – its larger mobile network has advantages over its main competitors.
In FY24, its mobile income rose 5% to $10.7 billion, and earnings before interest, depreciation and amortisation (EBITDA) increased 9% to $5 billion. The number of mobile handheld users increased 4.1% year over year, representing an increase of 562,000 subscribers. Average revenue per user (ARPU) rose 2.7%, excluding a prepaid one-off from product migration.
The strength of its mobile market position has supported the company's choice to increase its mobile prices, which could help grow profit in FY25.
Telstra's ongoing profit growth is helping fund the company's efforts to grow its dividend for investors.
In FY24, the company grew its annual dividend per share by 5.9% to 18 cents per share. At the current Telstra share price, that represents a grossed-up dividend yield of 6.5%.
