Why I'd buy this ASX share over a term deposit

Term deposits seem more attractive these days following four interest rate rises this year by the Reserve Bank of Australia (RBA) to take the cash rate to 4.60%. Even so, the ASX share Washington H. Soul Pattinson and Co Ltd (ASX: SOL) is a more appealing pick to me.

Term deposits can protect capital and can provide a pleasing level of passive income. However, that income is fixed and there's no growth potential. The capital value doesn't change and there's no organic growth of the passive income. The downside is protected but there aren't any potential gains aside from the fixed level of income.

Soul Patts may not be a household name, but the investment house can provide three pleasing elements, which I'll touch on below.

Dividends

Soul Patts isn't known for having a huge dividend yield, but the company can provide a solid level of passive income.

In the 2026 financial year, the company grew its annual dividend per share by 7.8% to $1.11 per share.

At the time of writing, that translates into a grossed-up dividend yield of 3.5%, including franking credits.

The business could have provided a larger dividend yield if it wanted to because it generated net cash flow from investments (NCFI) of $1.51 per share. It uses that NCFI to fund the dividends. The payout equates to a dividend payout ratio of 73.5%.

If the dividend payout ratio had been 100%, the grossed-up dividend yield would have been 4.7%, including franking credits.

Why not pay out all of the profit to shareholders? It's so that the ASX share can retain and re-invest some of those profits to help the long-term growth of the business.

Capital growth

One of the best advantages of investing in shares over a term deposit is that the share price can rise over time as the business grows its operations and underlying value.

Soul Patts owns a portfolio of assets across a range of areas including energy, resources, telecommunications, building products, industrial property, retirement living, agriculture, swimming schools, credit, fixed interest, electrification, and plenty more.

Over time, the businesses that Soul Patts has invested in can grow in value themselves.

Plus, Soul Patts regularly expands its portfolio by putting some of its retained cash flow to work, too.

Passive income growth

Another great reason to like Soul Patts is that it has a great track record of dividend growth, the best on the ASX for consistency.

The ASX share has increased its annual regular dividend every year since 1998. That's 28 years of dividend growth! Term deposits can't provide that passive income growth.

With how the business has hiked its dividend through the dotcom crash, the GFC, COVID-19, and two bouts of elevated inflation, I think it has demonstrated its ability to provide passive income growth.

Regular growth of NCFI helps fund payout rises and I expect this will continue in the years ahead as its portfolio expands further and existing investments flourish.

The post Why I'd buy this ASX share over a term deposit appeared first on The Motley Fool Australia.

Motley Fool contributor Tristan Harrison has positions in Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia has positions in and has recommended Washington H. Soul Pattinson and Company Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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