Wesfarmers Ltd (ASX: WES) shares can be a great option for annual dividend income because of the company's strong profit generation and commitment to shareholder returns.
For readers that haven't heard of this ASX share before, it's the parent company of businesses like Bunnings, Kmart, Officeworks, Priceline and Target. It used to own Coles Group Ltd (ASX: COL), but it divested the business.
Image source: Getty Images
How much dividend income are Wesfarmers shares going to pay?
In the 2022 financial year, ending June 2022, it paid an annual dividend per share of $1.80.
In FY23, the business is projected to pay an annual dividend per share of $1.86. This would represent year-over-year growth of 3.3% and it'd equate to a grossed-up dividend yield of 5.25% at the current Wesfarmers share price.
Wesfarmers is projected to deliver profit growth in FY23, enabled by its stores being unaffected by COVID restrictions (compared to FY22), a strong FY23 first half, and good performance by its operating businesses.
In FY24 it's forecast to pay an annual dividend per share of $1.92, which would represent a growth of 3.2%
$4,000 of annual dividend income
Wesfarmers doesn't have the biggest dividend yield, so we'd need to invest a fair amount in Wesfarmers shares to get to the goal.
If we think about the dividend for the new 2024 financial year, we'd need to own 2,084 Wesfarmers shares to get the full dividend income amount, if we exclude the bonus of franking credits.
How much are we talking to invest to gain that level of investment income? At the current Wesfarmers share price that would require a total investment of around $106,000. That's quite a bit, and obviously, portfolio diversification is an important element of effective investing.
How to reduce how much is needed
One of the great things about ASX shares is that they can deliver growth themselves – we don't need to add all of the cash ourselves to get to a sizeable portfolio value.
Wesfarmers itself is projected to see a sizeable jump in earnings per share (EPS) and dividends in FY25. It could get a boost of over a billion dollars of annual earnings, unlocked by the lithium project Mt Holland becoming operational.
In FY25, Commsec projections show that Wesfarmers shares could pay an annual dividend per share of $2.17. That would mean investors would only need to own 1,844 Wesfarmers shares. At the current valuation, that would come at a cost of $94,000, meaning we'd need around $12,000 less. According to Commsec, the Wesfarmers share price is valued at 20 times FY25's estimated earnings.
