The investing landscape looks quite different in 2026 than what ASX investors have become used to in recent years. Sure, we have seen the markets hit new all-time highs as recently as February. But that doesn't mean it is plain sailing going forward, particularly for passive income investors.
Dividends have always been a major drawcard for investing in the Australian stock market. However, the run that the S&P/ASX 200 Index (ASX: XJO) has been on over the past two years or so has had the less desirable effect of lowering the dividend yields available from many popular ASX dividend stocks. Before 2020, for example, it would have been rare to see Commonwealth Bank of Australia (ASX: CBA) shares on a yield under 4%. Ditto with Telstra Group Ltd (ASX: TLS) or even Coles Group Ltd (ASX: COL). These days, it's rare to see these stocks get close to 4%.
At the same time, interest rates have climbed to levels Australians haven't seen for 15 years. The zero-rate world of COVID is most certainly behind us.
So dividend yields are down, and 'safe' cash investment interest rates are up. That leaves the passive income investors on the ASX in quite the pickle.
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Where to invest for passive income in 2026?
Well, that's the $64,000 question. There are a few factors investors need to contemplate before finding the solution that works for them.
The first, and arguably most important, of these factors is risk tolerance. Many passive income investors, particularly retirees, wish to preserve their capital as a priority. If that is the case, then having the majority of one's investable capital invested in safe cash assets like term deposits is arguably a sound strategy. A few years ago, term deposits would get you 1% or 2% if you were lucky. But with the cash rate now at 4.35% (and perhaps set to rise even further), term deposits, or even savings accounts, with interest rates approaching 5.5%, are not uncommon.
Getting a 5.5% yield that comes with a government guarantee of capital protection (there are conditions to that) is certainly not something to turn one's nose up at. Particularly if capital protection is a major concern.
Saying that, term deposits are still term deposits. For one, they don't come with that added bonus of franking credits. The value of a fully franked dividend can push the grossed-up yield of a dividend stock from 3.5% to 5%. For another, just as they allow no downside risk, there's no potential for capital returns either. Despite inevitable volatility, a good ASX dividend stock can be expected to appreciate in value over time, while spinning off dividend income. A term deposit's capital, in contrast, will never appreciate.
The price of safety
That's the other factor passive income investors need to accommodate. ASX shares have always outperformed cash investments over long periods of time, as the data has always shown. Investors need to accept that the price of capital protection is lower returns, even if interest rates are relatively high.
Of course, for some passive income investors, that protection is worth forgoing the potential of higher returns. But that won't be optimal for all investors. At the end of the day, each passive income seeker needs to weigh up their own goals and tolerances, and decide which investment (or combination) is the right fit for them and their personal circumstances.
