ASX dividend shares can be a great way for investors to generate passive income. If I had $2,000 to invest, there are a couple of names that I think look great value.
One of the great things about investing during times of market uncertainty is that not only are the investments being offered at a lower price, but the dividend yield is also boosted.
While dividends aren't everything, they can provide a really good boost to the overall returns from shares. With that in mind, here are two I've got my eyes on that I'd split $2,000 between.
Metcash Ltd (ASX: MTS)
Metcash is a diversified supplier of food and drinks to independent retailers, and it has a hardware division.
Retailers the company supplies include IGA, Foodland, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
In hardware, Metcash owns the Mitre 10 and Home Timber & Hardware brands. It supports independent operators under the small format convenience banners Thrifty-Link Hardware and True Value Hardware, as well as a number of 'unbannered' independent operators. It also owns the Total Tools business.
Changes to shopping habits have led to an ongoing good performance for IGA's food and liquor divisions. People are reportedly continuing to stick to neighbourhood shopping.
The hardware division has also performed well.
In terms of the dividend, the ASX dividend share looks to pay a target dividend payout ratio of around 70% of underlying net profit after tax (NPAT).
The Metcash share price has dropped around 20% since May 2022, putting the FY23 forecast dividend grossed-up dividend yield at 8.2%.
Adairs Ltd (ASX: ADH)
The Adairs share price has suffered a much larger decline in the short- and medium-term. It's down around 30% from 1 February 2023 and is trading almost 60% lower from June 2021.
It's not surprising that the business has gone through a lot of volatility. Households are unlikely to buy the same amount of furniture and homewares through an entire economic cycle. But, I don't think it makes a lot of sense for investors to be as pessimistic as the share price decline suggests.
Remember, share prices should also reflect the potential long-term performance of a company, not just the next 12 months.
Adairs is a much bigger business than before COVID-19. Its acquisition of Focus on Furniture seems like a smart move – it gives Adairs more scale, enables Mocka to sell furniture in stores and can benefit from a national store rollout.
The ASX dividend share is looking to grow its membership numbers and upsize some Adairs stores (which are much more profitable). While this may not help short-term earnings, I think the company can generate better earnings in the long term.
I believe the fall of the Adairs share price makes it an excellent investment idea to consider at the current price of around $2 on a three-year investment timeline.
Commsec numbers suggest Adairs could pay a grossed-up dividend yield of 11.7% in FY23 and 15.6% in FY25. It's priced at just 6x FY25's estimated earnings.
