2 little-known ASX dividend shares to buy for income

The 2 little-known ASX dividend shares in this article could help you unlock a pleasing amount of income despite the real low interest rates.

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I think that there are some little-known ASX dividend shares that could be worth buying for income.

Australia's official interest rate is now just 0.25%. That makes it really hard to generate any meaningful income from a bank account. It's hard for bank interest to even keep up with inflation at the moment.

I believe that these two ASX dividend shares could be good ways to generate more dividend income:

Pacific Current Group Ltd (ASX: PAC)

Pacific is a boutique investment business. It partners with global asset managers to help them grow. Pacific takes an equity stake and it also brings its expertise to help them grow funds under management (FUM).

One of the most important things to remember is that a dividend is going to be quite closely linked to the earnings. If the earnings are growing at a fast pace then the dividend can rise rapidly too.

In FY20, Pacific Current delivered underlying net profit after tax (NPAT) growth of 21%, rising to $25 million and underlying earnings per share (EPS) grew by 18% to $0.44. The FY20 annual dividend was grown by 40% to $0.35 per share. That represents a sustainable underlying dividend payout ratio of around 80%.

Despite COVID-19 impacts, FY20 was a strong year of growth for the ASX dividend share. Excluding stakes sold and acquired during the year, funds under management (FUM) grew by 52% to $93.3 billion. Pacific thinks that asset gathering efforts could improve in FY21 with new commitments.

Using the current Pacific share price and FY20 dividend, it has a grossed-up dividend yield of 8%. That's a good starting yield for an ASX dividend share.

However, looking ahead, the Pacific share price is trading at just 9x FY23's estimated earnings.

Naos Emerging Opportunities Company Ltd (ASX: NCC)

This is a small listed investment company (LIC) which targets small ASX shares. Indeed, it looks for businesses with market capitalisations under $250 million.

Naos operates a strategy of only owning shares that it has high conviction in. That translates to owning around 10 names in its portfolio.

It owns some promising ASX shares in its portfolio. In its latest update for September 2020, it revealed that three examples of its core portfolio are: BTC Health Ltd (ASX: BTC), Saunders International Ltd (ASX: SND) and Experience Co Ltd (ASX: EXP).

Naos tries to invest for the long-term and it sticks to the industrial sector. The LIC ignores the index, so over the shorter-term its performance can be quite different to the index. Since inception in February 2013, its investment portfolio (after operating expenses) has outperformed the S&P/ASX Small Ordinaries Accumulation Index by an average of 5.45% per annum.

The benefit of a LIC structure is that it can generate investment returns from growth shares and then pay out a reliable and consistent dividend from those returns.

Naos Emerging Opportunities Company has increased or maintained its dividend every year since FY13. That's a good record considering its dividend yield is so large.

At the current Naos Emerging Opportunities share price it offers a trailing grossed-up dividend yield of 10.5%.

Foolish takeaway

Both of these ASX dividend shares seem like good options to grow your income in my opinion. Naos offers high-conviction diversification. There are some great companies that are valued at under $250 million.

However, my pick for income would be Pacific because of its potential growth over the next few years, which could lead to a rising share price and a growing dividend. I think it could grow its FUM strongly during FY21, particularly if COVID-19 impacts start subsiding.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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