Term deposits at Australian banks are some of the safest places to put money. In fact, some banks still offer attractive deals, with a solid interest rate of more than 4%. However, S&P/ASX 200 Index (ASX: XJO) shares appeal to me more.
While term deposits protect against risks, they don't have any potential to deliver growth either. There's no capital growth or passive income growth potential.
The two businesses I'm about to highlight have given investors pleasing passive income growth over the last few years, and I'm expecting more over the long-term.
Washington H. Soul Pattinson and Co. Ltd (ASX: SOL)
Soul Patts is the first ASX 200 share I'd buy rather than a term deposit.
The investment house has been the most reliable ASX dividend share over the last three decades – it has grown its payout every year since 1998. That suggests a shareholder could decide to spend all of the payment each year and still likely see a larger payout in the following year. Aside from interest rate changes (both up and down), term deposit holders would be left with the same interest payments if they spent all of their interest income each year.
Perhaps even more impressively, the company has paid a dividend every year for 120 years since it listed. Those payments flowed through world wars, global pandemics and recessions. That's a compelling history of passive income.
How has it been so reliable? The business pays its dividend out of the cash flow it receives from its investment portfolio each year. Soul Patts typically pays out a majority of this cash flow each year which comes from defensive investments, ensuring a higher dividend payment for Soul Patts shareholders than last year.
The ASX 200 share regularly puts its excess cash into new investments, expanding the portfolio, unlocking more growth avenues and diversifying its investment base further.
I like the direction the business has been building its portfolio, in areas such as industrial properties, swimming schools and agriculture. I think those areas have significant expansion potential.
I'm expecting the business to grow its payout to at least $1.08 per share in FY26. That would be a grossed-up dividend yield of at least 4%, including franking credits, at the time of writing.
Telstra Group Ltd (ASX: TLS)
Telstra is another ASX 200 share that I think has a good future for dividends and growth.
There are few businesses that offer as important a service to households and businesses as Telstra. An internet connection may be needed for activities like work, education, entertainment and connecting with others.
The company has the most mobile subscribers in Australia and a number of other advantages. It has the largest mobile network, with coverage of 3 million square kilometres and 99.7% of the population. Telstra also boasts that it has Australia's largest 5G network with 95% population coverage.
But, Telstra isn't waiting for its rivals to catch up – it's investing another $800 million in its mobile network over the next four years to extend its leadership and deliver an advanced 5G that is faster, more reliable and more efficient than 5G today.
By having the best network, it can charge more than rivals because of the quality and reliability, allowing it to earn a better margin from its network and grow profit faster.
Thanks to a growing subscriber base and strengthening margins, I believe the ASX 200 share can continue increasing its payout, as it has done in the last few financial years.
I'm expecting Telstra to pay an annual dividend per share of 20 cents in FY26, translating into a grossed-up dividend yield of 6%, including franking credits.
