Term deposits are a great tool to protect capital, but not such a powerful option to generate passive income. Certain S&P/ASX 200 Index (ASX: XJO) shares are a much better option, in my view.
Term deposits may stop capital destruction, but they also lack the ability to deliver capital growth. ASX 200 shares can deliver capital growth, income growth and a good dividend yield. The term deposit return is limited to the interest rate it offers.
The two businesses that I'll highlight are defensive companies with intentions to grow their payout in the coming year (and likely beyond).
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Sonic Healthcare Ltd (ASX: SHL)
Sonic Healthcare is a global pathology business with a presence in multiple countries including Australia, Germany, Switzerland, the UK, the US and New Zealand.
We don't choose when to get sick based on how the economy is performing, so demand is consistent. People generally place a high importance on their health, so I'd describe the company as defensive.
Impressively, the ASX 200 share has grown its payout in most years over the last three decades, with only a couple of years in which the dividend was maintained. It has delivered shareholders significant dividend growth over the years.
I'm expecting more growth in the coming years as the company benefits from rising and ageing populations in its key markets. Plus, new technology and tools can help the business provide better, more efficient pathology.
Sonic grew its operating profit (EBITDA) by 8% to $1.7 billion in FY25, with the normalised EBITDA margin expanding by 40 basis points. It's expecting to grow its EBITDA to between $1.87 billion to $1.95 billion in constant currency terms, or around $2 billion at the exchange rate at the time of the guidance.
The company is expecting its earnings per share (EPS) to grow by around 19% in FY26 using (at the time) current exchange rate.
The ASX 200 share says that future earnings growth is expected to support its "progressive dividend strategy".
It currently has a 5.1% dividend yield, excluding franking credits, which is stronger than what an Aussie can get from a term deposit these days.
Chorus Ltd (ASX: CNU)
Chorus is a New Zealand business that owns a high-speed fibre broadband network. The business has invested significantly in its infrastructure over the last few years and now the business can benefit from the cash flow generation of the assets.
With higher profits, the ASX 200 share can deliver larger dividends and shareholders can reap the benefits.
Western society is becoming increasingly digital, so Chorus is well placed to benefit as more traffic goes through its cables.
In FY25, the business grew its annual dividend per share by 21% and it's expecting to hike its FY26 dividend by another 4.3% to NZ 60 cents. At the current Chorus share price, that translates into a dividend yield of 6.3%.
