Cheap ASX shares can be very effective ASX dividend shares. When businesses have low valuations, it bumps up the dividend yield on offer.
The elevated volatility last year has opened up a number of opportunities for investors to find some strong passive income.
It's hard to say when share prices will get back to their former heights, but I believe that good businesses will be able to grow their earnings over the long term and this will encourage investors.
I don't know how long investors will remain pessimistic – there are already signs that confidence is returning despite inflation remaining relatively high. I'd want to jump on these cheap ASX shares while they still offer great income potential.
Metcash Limited (ASX: MTS)
There are three segments to this business – food, liquor and hardware.
In food, it supplies IGAs around the country. The liquor division supplies independent liquor stores around the country, including IGA Liquor, Bottle-O, Cellarbrations, and Porters Liquor. The hardware division owns brands like Mitre 10, Home Timber & Hardware and Total Tools.
Using the numbers on Commsec, Metcash is priced at just 13 times FY23's estimated earnings with a possible grossed-up dividend yield of 7.5%.
It grew its FY23 half-year dividend by 9.5% to 11.5 cents per share. The second half of FY23 has started strongly, with group sales up 6.2% "as consumers continue to be driven by robust underlying demand and inflation."
The hardware division is now the division making the biggest profit. It's expected to continue to see strong underlying demand in the second half of FY23.
This business trades on a lower price/earnings (P/E) ratio compared to Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd (ASX: WES), which is one of the reasons why it seems like a cheap ASX share to me.
Nick Scali Limited (ASX: NCK)
Nick Scali is one of the largest furniture sellers in Australia – it owns both the Nick Scali and Plush businesses after an acquisition.
The Nick Scali share price has dropped by around 20% over the last year, pushing up the prospective dividend yield.
According to Commsec, it's valued at just 10 times FY23's estimated earnings with a potential grossed-up dividend yield of 9.8%. In FY24 it might pay a grossed-up dividend yield of 8.5%.
While there may be fewer sofas bought in 2023, the cheap ASX share could keep generating good profits in the coming years.
The cheap ASX share has a number of initiatives to grow profit over time, including a store rollout, increasing online sales and a range expansion.
Best & Less Group Holdings Ltd (ASX: BST)
Best & Less sells value apparel to families. The business has a focus on kids and women – it says it has better quality than cheap retailers and better value than specialty retailers. Baby products are the 'entry point' and it's looking to grow its market share in baby, kids and womenswear. It also wants to achieve faster-than-the-market online sales growth and grow its store network.
Using the numbers on Commsec, the Best & Less share price is valued at under 7 times FY23's estimated earnings with a possible grossed-up dividend yield of almost 15%.
This business is projected to grow its earnings and dividend in FY24 and FY25, which could make it seem like a very cheap ASX share at the current level.
