ASX dividend shares can be a very effective way to unlock high levels of passive income.
The tricky thing is knowing what sort of ideas to look at. There are some businesses that may seem like they have very high dividend yields, but the last 12 months of dividends may not be the same as the next 12 months.
For example, we recently saw in Rio Tinto Limited's (ASX: RIO) 2022 result that its total dividend per share was cut by 53% after a 41% drop in net profit after tax (NPAT).
If investors were expecting the same dividend from the ASX mining share, they may have been disappointed. But, I don't think it's wise to expect that miners can pay the same level of dividend year after year because resource prices can significantly change if supply and demand change heavily too.
For investors looking for a high level of income – somewhere in the region of 10% or higher – we're talking about a business that doesn't have a high valuation and is paying out relatively a large amount of its annual profit. If an investor were looking for an ASX share that could provide over $1,000 of dividend income from a $10,000 investment consistently, I have an idea.
Shaver Shop Group Ltd (ASX: SSG)
Shaver Shop owns a national network of stores across Australia. It's also looking to grow in New Zealand, which is unlocking more growth for the ASX dividend share. The company has a total of 122 stores.
It sells a wide range of male and female grooming products. But, it's also expanding its range with other categories like oral care, hair care, massage, air treatment and beauty categories.
Despite all the worries about the economy, its financials continue to look good. The FY23 half-year result saw total sales increase 3.8% to $131.9 million, NPAT went up 4.5% to $13.7 million and the interim dividend was bumped up by 4.4% to 4.7 cents per share.
It's that dividend growth that I particularly like. It has steadily grown its dividend each year since 2017 (when it first started paying a dividend).
The first seven weeks of the second half of FY23 saw gross profit growth, even though total sales dropped 2.1%. This was thanks to a higher gross profit margin.
Using the last two declared dividends, Shaver Shop currently has a grossed-up dividend yield of 12.6%. That would create $1,260 of annual passive income (including franking credits) from a $10,000 investment.
Is this a good idea?
For investors that have a low tax rate and are focused on dividends, I think Shaver Shop could be an effective ASX dividend share to choose. However, I'm not sure the company's share price can deliver tons of share price growth from here.
High-yield dividends may not suit every investor. There are other businesses which could deliver a solid amount of dividend income, but also achieve stronger after-tax total returns over the long-term.
A few S&P/ASX 200 Index (ASX: XJO) shares that may be able to deliver a combination of dividends and growth include Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), Brickworks Limited (ASX: BKW) and Wesfarmers Ltd (ASX: WES). But, the starting dividend yields are lower from these names.
