2 ASX 200 shares with strong dividend income prospects

APA and Magellan could both be good ideas for dividend income.

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man handing over wad of cash representing ASX retail capital return

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S&P/ASX 200 Index (ASX: XJO) shares could be a good place to find dividend income opportunities.

There are more blue chips out there capable of paying big dividends than just Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Telstra Corporation Ltd (ASX: TLS).

Some ASX 200 dividend shares are expecting long-term profit growth and dividend increases:

APA Group (ASX: APA)

APA is a large gas pipeline owner. It’s currently rated as a buy by Morgans, with a price target of $9.98.

Morgans is attracted to the fact that APA has contracts that are linked to CPI inflation, and this means the current high levels of inflation can help the business.

APA has grown its distribution every year for the last decade and a half, driven by growing operating cashflow as more energy projects come online.

In FY22, the ASX 200 dividend share is expecting to grow its distribution by another 3.9% to 53 cents per security. At the current APA share price, that translates into a distribution yield of 5.5%. Morgans expects the distribution per unit to increase again in FY23 to $0.55 per security.

APA recently bought some debt of Basslink, which owns and operates the 370km high voltage direct current electricity interconnector between Victoria and Tasmania. It provides two-way access to 500MW of electricity and is “critical” to the export of Tasmania renewable energy to Australia’s mainland. APA wants to buy Basslink.

The energy infrastructure business wants to expand its electricity transmission footprint and invest in renewable energy sources. The business sees many billions of dollars of opportunities to invest in Australia (and the US) in electricity transmission and renewable energy generation in the future.

APA has said there is potential for its existing pipelines to be repurposed for hydrogen (fully or blended). This can future-proof the ASX 200 dividend share’s assets.

Magellan Financial Group Ltd (ASX: MFG)

Magellan is a large fund manager that is listed on the ASX.

It’s currently rated as a buy by the brokers at Macquarie Group Ltd (ASX: MQG).

Excluding the performance fee dividend, Magellan’s ordinary dividend continues to rise. By FY23, Macquarie is expecting Magellan’s annual dividend to rise to $2.40 per share. That would translate to a partially franked dividend yield of 7%.

Whilst underperformance of its global equity strategy has led to negative sentiment, Macquarie thinks the dividend yield and cheaper price/earnings ratio makes it seem attractive.

On Macquarie’s numbers, the Magellan share price is valued at 13x FY23’s estimated earnings.

The ASX 200 dividend share reported that its total funds under management (FUM) increased by $1.5 billion to $114.8 billion in October 2021.

Magellan is also feeling confident about some of its external investments including Guzman y Gomez and Barrenjoey.

GYG is a quick service Mexican food chain with global operations across Australia, Singapore, Japan and the US. It had 158 restaurants at the last count with plans for 30 in the next year alone.

Barrenjoey is a new local investment bank which is already profitable, with revenue tracking ahead of expectations. Magellan said it is “highly likely that Barrenjoey will become very valuable to Magellan over time”.

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Motley Fool contributor Tristan Harrison owns shares of Magellan Financial Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended APA Group and Telstra Corporation Limited. The Motley Fool Australia has recommended Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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