The term deposit space looks negative for passive income. Every time the RBA cuts the cash rate, it likely means a reduction in what interest rate banks will offer savers. Therefore, this could be a good time to invest in S&P/ASX 200 Index (ASX: XJO) shares.
With the RBA expected to cut multiple times over the next 12 months, income investors would probably be wise to look at income-paying stocks.
I'd look at businesses with a good dividend yield, relatively defensive earnings and a good growth outlook. The two businesses below tick those boxes for me.
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Centuria Capital Group (ASX: CNI)
This is a fund manager focused on real estate funds, both listed and unlisted. Two of its most well-known investments include Centuria Industrial REIT (ASX: CIP) and Centuria Office REIT (ASX: COF). The business also provides tax-effective bonds.
While rate cuts seem like bad news for term deposits, they should be good news for Centuria in multiple ways. It could boost property valuations, supporting funds under management (FUM) growth. Rate cuts should reduce debt costs over time. The rate-cutting environment could also encourage clients to allocate more money to Centuria.
The ASX 200 share decided to increase its FY25 distribution by 4% in FY25 to 10.4 cents per security. That translates into a distribution yield of 5.8%.
I'm confident the business can grow its operating earnings in the medium-term, which should allow Centuria to grow its distribution further in the coming years.
APA Group (ASX: APA)
APA is one of the largest energy infrastructure businesses on the ASX, with a significant gas pipeline network, gas-powered energy generation, gas processing, gas storage, solar farms, wind farms and electricity transmission. I like the diversification on offer.
Impressively, the business has grown its distribution every year for the past two decades, which is the second-longest record on the ASX. I think stability and consistency are very valuable for income investors.
The distribution is steadily growing thanks to the increase of cash flow generation. A large majority of its revenue is linked to inflation, so it has seen robust revenue growth in the last few years to help offset the cost of higher debt.
The ASX 200 share is regularly investing in its portfolio, whether that's additional pipelines, electricity transmission, renewable energy generation or energy storage. This growth is helping increase the earnings and annual distribution.
For FY25, the business guided that the annual distribution would grow by 1.8% to 57 cents per security. That translates into a distribution yield of 6.8%.
