Following multiple interest rate rises this year, the interest income on offer from term deposits looks appealing. However, I still prefer ASX dividend shares.
Savers can now get term deposit interest rates in the mid-5% range, which challenges the yield on offer from certain ASX dividend stocks.
But, it's not just the income over the next 12 months that I'd look at. It's the passive income beyond that time period that the ASX dividend shares can shine.
Businesses can grow their payouts sustainably if their earnings grow. Term deposit rates are stuck at the same rate (ignoring interest rate changes). Over time, the ASX dividend share can deliver significantly more income.
So, below are two businesses that offer defensive earnings, with payout growth.
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Centuria Industrial REIT (ASX: CIP)
This first business is a real estate investment trust (REIT) that invests in industrial property across Australian cities.
It ticks the box for distribution growth. In FY26, it grew the distribution per unit by 3% and it expects to hike the payout again in FY27 by another 3%.
The business has guided that it expects to pay a distribution per unit of 17.3 cents. That translates into a forward distribution yield of 6.25% – superior to what term deposits are offering today.
I expect the REIT can continue growing its distribution because the outlook for rental income looks so positive.
Following the significant increase of the rental potential of metropolitan industrial land this decade, it's now seeing that boost flow through as new leases are signed.
In the first quarter of FY27, the ASX dividend share reported re-leasing spreads of 31%. That means the new lease earns 31% more rental income than the old lease, which is a significant increase.
The business estimates that the portfolio is 17% under-rented on average, providing a "significant runway for future earnings growth beyond FY27". It can grow earnings without requiring additional balance sheet deployment.
Medibank Private Ltd (ASX: MPL)
Medibank is the largest private health insurer in Australia, with its Medibank and ahm brands. The business is regularly growing its healthcare division with the acquisitions. Investments include certain businesses such as Myhealth Medical and a minority stake in a few hospitals.
Healthcare is generally a defensive industry that can provide resilient earnings and pay consistent dividends. There's also a growth tailwind for the business with Australia's ageing population.
The ASX dividend share's FY26 result was a demonstration of how it can deliver earnings growth and payout growth for shareholders.
It saw net resident policyholder growth of 22,100 (or 1.1%), which helped revenue grow 5.9% to $8.6 billion. Health insurance operating profit rose 3.8% to $769.8 million and Medibank Health segment profit increased 31.3% to $100.7 million. Including corporate overheads, group operating profit grew 6.7% to $813.5 million.
That operating profit helped the dividend per share increase 6.7% to 19.2 cents. That translates into a trailing grossed-up dividend yield of 5.7%, including franking credits.
The forecast on CommSec suggests the business could hike its dividend by 12% to 21.5 cents per share. That'd be a grossed-up dividend yield of 6.3%, including franking credits.
