Term deposits can be appealing to savers wanting to protect their capital while generating a bit of passive income. However, there are a few reasons why ASX dividend shares appeal to me more.
Currently, it seems like an appealing time for term deposits since RBA has raised interest rates several times this year. This has lifted the potential interest rate that Aussies can get from their financial institution. It's quite easy to find a term deposit offering a 5.5% interest rate these days.
However, I don't think term deposits are the right choice for me to build wealth.
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Capital growth
While a term deposit may protect money from volatility and declines, it also means there's no chance of delivering long-term capital growth either.
When we invest in growing (ASX) shares that are increasing their underlying value, the investment can appreciate over time.
As someone in their 30s, if I'm investing for passive income, I'd rather invest $10,000 in an ASX share that could rise to $11,000 in value over a year (and more in the longer-term) compared to putting $10,000 into a term deposit which is guaranteed to stay valued at $10,000 after the term, excluding the generated passive income.
Compounding is a very powerful tool and I plan to utilise that as much as I can in the years ahead. But, I'll note that I do have a separate cash amount as an emergency fund in a high interest savings account.
One of the ASX dividend shares I'm very optimistic of capital growth is the exchange-traded fund (ETF) WCM Quality Global Growth Fund – Active ETF (ASX: WCMQ). It targets a 5% distribution yield and aims for businesses with strengthening economic moats and a corporate culture that fosters the strengthening of those competitive culture.
WCMQ ETF's long-term investment returns have been compelling, enabling for capital growth of the fund value while still paying its 5% distribution yield.
Dividend growth
The other great reason to own ASX dividend shares is because they can offer growth of the passive income without needing to retain the money to earn mor.
Let's run through why term deposits aren't attractive to me on the income side. Let's say there's a $10,000 term deposit with a 5% interest rate, it would make $500 of annual passive income. If the saver wanted to spend that $500, the $10,000 could only generate another $500 over the next year. Term deposit holders can re-invest the interest, but then there's no useable cash for spending.
With an ASX dividend share, a business can pay its dividend and organically grow its payout because of business growth. With $10,000 in an ASX dividend share with a 5% dividend yield, it would generate $500 of passive income and an investor could spend that. The business could hike its dividend by 10%, unlocking $550 of passive income, without any re-investment needed.
Of course, re-investing the dividends would mean supercharging wealth building and the annual dividend flow.
One of my favourite ideas for dividend growth is MFF Capital Investments Ltd (ASX: MFF), a listed investment company (LIC) that targets a global portfolio of high-quality, growing shares. Its guided FY26 dividend translates into a grossed-up dividend yield of 6.3%, including franking credits. Its FY26 payout is 23% higher than FY25 and I believe it could increase its annual dividend by another 19% in FY26.
But, there are plenty of ASX dividend shares out there offering the potential for both dividend growth and capital growth, of course.
