There are some ASX blue chip shares that offer really good potential dividend income.
I'm not talking about businesses like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB). I am also not talking about Telstra Corporation Ltd (ASX: TLS) or BHP Group Ltd (ASX: BHP).
I believe it's important to find blue chip shares that still have plenty of potential earnings growth left. If a business is growing earnings then it has much more chance of maintaining and growing the dividend.
There are some ASX blue chip shares worth buying for dividends in my opinion:
Magellan Financial Group Ltd (ASX: MFG)
Magellan is a fund manager that focuses on investing in international shares. The great thing about a funds management business is that they don't require much capital to expand. The ASX fund manager has been steadily growing its funds under management (FUM) for many years. It now has over $100 billion of FUM.
As the FUM grows then Magellan's core earnings grow from the management fees. It also regularly generates performance fees for shareholders because of how consistently it manages to outperform the global share market.
The ASX blue chip share has plenty of other avenues for growth including an incoming retirement product and other investments like its stake in new investment bank Barrenjoey.
It offers a partially franked dividend yield of 3.9%. That's a solid starting yield as it continues to grow over time.
Brickworks Limited (ASX: MFG)
I think that the market-leading bricks business could be one of the best ASX dividend shares.
Its dividend hasn't been cut for over 40 years, including through COVID-19, so it has given shareholders a very reliable source of income.
Whilst a lot of the ASX blue chip share is focused around the construction products of the business – bricks, paving, masonry, roofing, precast and so on – but it's actually other defensive, quality assets that fund Brickworks' dividend.
It owns half of an industrial property trust along with Goodman Group (ASX: GMG) that will soon count Amazon and Coles Group Ltd (ASX: COL) as tenants in huge distribution warehouses. The net income of the trust is a sizeable part of funding Brickworks' dividend.
The other important part is its shareholding of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) that it owns almost 40% of. Brickworks receives growing dividends from the investment conglomerate. Brickworks doesn't need the cashflow of its construction business to pay its dividend.
At the current Brickworks share price it offers a grossed-up dividend yield of 4.9%.
Wesfarmers Ltd (ASX: WES)
Wesfarmers is a diversified company which owns a variety of businesses including Bunnings, Officeworks, Kmart, Target and Catch.
It has done a great job to expand over the years and become the clear market leader in home improvement. Bunnings is a fantastic retailer, it may be the best in the country.
FY20 was a great performance by Bunnings. Revenue went up by 13.9%. It generated a return on capital of 58%, up from 50.5% in FY19. Its earnings before tax (EBT) margin (excluding property) improved from 11.7% to 12.1%. The performance of Bunnings is imperative for Wesfarmers because it generates around two thirds of the profit. Growth of Bunnings profit will help grow Wesfarmers' dividend.
Wesfarmers continues to invest in new businesses which diversifies and expands its addressable market. In hindsight, Catch was a fantastic acquisition and it's capitalising on the huge growth of e-commerce. In the second half of FY20 Catch grew its gross transaction value by 75.5%.
I like that Wesfarmers can continue to alter its holdings towards the future growth opportunities, like it did with Coles. That's one of the main reasons why I think it's a great ASX blue chip share for future dividends. .
At the current Wesfarmers share price it has an ordinary grossed-up dividend yield (based on $1.52 per share) of 4.7%. In my opinion, it's always a solid ASX dividend share for shareholders.
