Is right now a once-in-a-decade chance to buy ASX shares for passive income?

Investors have an exciting chance to invest for above-average yields.

A man reacts with surprise when her see a bargain price on his phone.

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Key points

  • Higher interest rates have given investors the chance to buy stocks with strong yields
  • The retail sector may face uncertainty, but by FY25, I think the passive income payments could have improved significantly
  • Commercial real estate is facing troubles, but I think there’s a long-term opportunity for some sections of the REIT space – farmland and industrial properties

ASX shares are a great place to find passive income opportunities in my opinion. The dividend yields are really exciting, particularly as yields from companies can be boosted by franking credits.

There are two things that can affect the dividend yield. The first is the dividend payout ratio, which says how much of the company's profit it's paying out each year. The other one is the price/earnings (P/E) ratio – what multiple of earnings the company is trading at.

High dividend yields aren't necessarily great because they could signify that there's a higher chance of a cut, but some businesses are trading on such a low earnings multiple that a few yields look too good to ignore.

The S&P/ASX 200 Index (ASX: XJO) has gone up by more than 10% since June and September last year, as we can see on the chart below.

After this recovery, I wouldn't call the whole market a once-in-a-generation opportunity to get passive income. But, there are two areas that I think we could call rare opportunities.

Retail

It's understandable that the retail sector has gone through a bit of volatility. How much people have to spend on discretionary items can change if the economy goes through a downturn and if households need to tighten their belts.

We've seen share prices fall for a number of retailers, and I think that's opening up a number of great long-term opportunities, in my opinion. The low share prices could mean good dividend yields over the next 12 months and incredible dividend yields in the longer term, with FY25 and beyond in mind.

I'd point to names like homewares and furniture retailer Adairs Ltd (ASX: ADH), youth apparel retailer Universal Store Holdings Ltd (ASX: UNI), shoe retailer Accent Group Ltd (ASX: AX1) and grooming retailer Shaver Shop Group Ltd (ASX: SSG) that could be good passive income opportunities.

In FY25, Adairs could pay a grossed-up dividend yield of 15.5%, Universal Store could pay a grossed-up dividend yield of 11.9%, Accent could pay a grossed-up dividend yield of 11.3% and Shaver Shop could pay a grossed-up dividend yield of 17%.

Commercial real estate

Higher interest rates are having a double-whammy impact on real estate investment trusts (REITs). It's hurting the valuation of the properties and it is likely to hurt the rental profit because of the higher interest rate costs.

I'm not looking to invest in REITs that are focused purely on office buildings or shopping centres. I think the jump in work-from-home and online shopping during COVID-19 has changed the outlook for those areas of the property market, and I'm wary of valuation write-downs of those buildings.

However, I think farmland and industrial properties could pay very attractive passive income yields in the next few years.

According to Commsec, in FY25 Rural Funds Group (ASX: RFF) could pay a distribution yield of 6.8%, Centuria Industrial REIT (ASX: CIP) could pay a distribution yield of 5.1% and Charter Hall Long WALE REIT (ASX: CLW) could pay a distribution yield of 6.5%.

Foolish takeaway

I think the higher interest rates have opened up some good opportunities in these two sectors, particularly in retail. In three years' time, I think both the share prices and passive income yields could be pleasingly higher as inflation and interest rates normalise.

Motley Fool contributor Tristan Harrison has positions in Rural Funds Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Adairs. The Motley Fool Australia has positions in and has recommended Adairs and Rural Funds Group. The Motley Fool Australia has recommended Accent Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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