Macquarie Group Ltd (ASX: MQG) is one of the largest businesses on the ASX. But is it one of the best ideas as an ASX dividend share for income in the S&P/ASX 200 Index (ASX: XJO)?
Many of the biggest ASX 200 shares are known for being dividend payers, such as 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), BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO), and Fortescue Metals Group Limited (ASX: FMG).
So where does Macquarie fit in?
Macquarie is a global investment bank with exposure to four main segments with different businesses – Macquarie Asset Management (MAM), banking and financial services (BFS), commodities and global markets (CGM), and Macquarie Capital.
Macquarie dividend
Macquarie's board has committed to a dividend policy to pay out between 50% to 70% of annual profit.
In the company's recent FY22 result, the board decided the final dividend would be based on a 50% dividend payout ratio which, in dollar terms, was a dividend of $3.35 per share. This led to the overall FY22 payout ratio being 50%, with an annual dividend of $6.22 per share.
At the current Macquarie share price, that annual dividend translates into a partially franked dividend yield of 3.6%. On top of that, Macquarie shares have risen by 20% over the last year so the past 12 months have been handy for shareholders.
I like the above-mentioned dividend yield considering it doesn't factor in the franking credits and it's only based on a 50% dividend payout ratio.
Why could a 50% dividend payout ratio be attractive?
It would be understandable to want as much dividend income as possible each year.
However, Macquarie operates across the world in a number of segments. There are investment opportunities everywhere and the business has proven it can identify the right areas to target.
In FY22, Macquarie generated $4.7 billion of net profit after tax (NPAT). Five years ago, in FY17, it made $2.2 billion of net profit. Over the past five years, Macquarie has more than doubled its profit and the Macquarie share price has doubled as well.
By retaining half of the net profit each year, the company can invest that money back into the business and make more profit.
Macquarie made a return on equity (ROE) of 18.7% in FY22 and 14.3% in FY21. In other words, Macquarie has made a return of at least 14% on the money in the business in the last two years, compared to a dividend yield which is in the low-to-mid single digits. Shareholders seem to get a stronger return by leaving profit in the business.
I think Macquarie has struck a good balance between rewarding shareholders with dividends and investing for profit.
Foolish takeaway
I think Macquarie is a very effective ASX dividend share in the large cap space. It can provide a balance between dividends and growth over the long term.
At the time of writing, the Macquarie share price has dropped 13% over the last month, so it's now cheaper. While there could be more volatility ahead, I think Macquarie is well-positioned to get through whatever happens next.
