I think that ASX stocks are a great way for investors to unlock passive income. Metcash Limited (ASX: MTS) shares could be one of the best options for dividends.
Metcash might not be a name that many investors are familiar with. However, it's the company that supplies IGA supermarkets. It's also the supplier of liquor to Cellarbrations, The Bottle-O, IGA Liquor, Thirsty Camel, Big Bargain Bottleshop, Duncans and Porters Liquor.
But, it also has a hardware division that is the second-largest player in the Australian hardware market. It has the Mitre 10 brand, Home Timber & Hardware and Total Tools. There are over 700 stores across metro and regional areas across the country.
Metcash passive dividend income expectations
A monthly passive income of $500 equates to $6,000 of annual passive dividend income.
According to data on Commsec, the company is projected to pay an annual dividend per share of 22 cents. If an investor had just over 27,000 Metcash shares then they'd get the $6,000 in cash dividends, plus all of the franking credits as well. The franking credits can be a boost to after-tax returns.
At the current Metcash share price, the 22 cents per share forecast equates to a grossed-up dividend yield of around 7.5%.
The dividend yield is quite high because the company aims to have a dividend payout ratio of around 70% of underlying earnings. This still leaves around 30% of annual underlying earnings within the business so that it can achieve more growth in the next year.
Why is the ASX stock compelling?
I think there has to be more to an ASX dividend share than its dividend yield to make it investable. I believe it needs to offer good signs of longer-term profit growth.
With Metcash, the company says that its operating leverage is helping with price competitiveness and high costs.
The ASX stock is focused on improving the network competitiveness of the food stores, with upgrades and refreshes. The supply chain is being improved with distribution capacity and capability expansion – a new distribution centre in Victoria is expected in 2024.
In liquor, there are investments in stores and cool room upgrades. It's introducing more owned and exclusive brands to the portfolio to support supplier partnerships. Metcash is also working on improving the supply chain of the liquor division.
The hardware division now makes the most earnings before interest and tax (EBIT). The company is working on growing the store network, improving its offer for builders, as well as growing its presence in the DIY part of the market.
The second half of FY23 started well. In the first four weeks, Metcash reported food sales growth of 4%, hardware sales growth of 8% and liquor sales growth of 8.9%. This could drive the passive dividend income higher in FY23.
Foolish takeaway
I think Metcash's operations offer a good mix of defensive earnings with food and liquor, as well as growth through the hardware division.
Its shares look good value to me, trading at just 13 times FY23's estimated earnings according to Commsec.
