ASX shares can pay large dividend yields thanks to low valuations, a generous dividend payout ratio, and franking credits.
Australian companies that pay income tax to the ATO can attach franking credits to their dividend payments, which boosts the after-tax dividend yield for Australian tax residents. It can turn a 7% fully franked dividend yield into a 10% grossed-up dividend yield.
When I look at various sectors, retail is one that sometimes sticks out to me as an option for large dividend income. Retail is usually a capital-light sector – that is, the companies don't need to hold onto a lot of cash – and it typically has a fairly low price/earnings (P/E) ratio.
There are plenty of businesses with high trailing dividend yields. I'm going to talk about two.
Step One Clothing Ltd (ASX: STP)
Step One Clothing is a direct-to-consumer online retailer of innerwear/underwear. It offers an exclusive range of "high-quality, organically-grown and certified, sustainable, and ethically manufactured innerwear".
In FY23, it made $43 million of revenue in Australia, $20.3 million in the UK, and $1.9 million in the US. It hopes to grow its revenue in all three countries in the longer term.
After working on profitability, Step One grew underlying earnings before interest, tax, depreciation and amortisation (EBITDA) by 33% to $12 million and underlying net profit after tax (NPAT) to $8.6 million.
The generation of $8.6 million of NPAT enabled the ASX share to pay an annual dividend per share of five cents. At the current Step One Clothing share price – which has risen 46% in a month – the FY23 payment translates into a grossed-up dividend yield of 12.5%.
Shaver Shop Group Ltd (ASX: SSG)
Shaver Shop is a retailer of male and female personal grooming products and aspires to be the market leader in "all things related to hair removal". It also sells products across oral care, hair care, massage, air treatment, and beauty categories.
The business has grown its dividend each year since 2017, though growth is certainly not guaranteed to continue. An expanding store network could help offset any same-store sales decline in FY24 amid the difficult retail environment due to inflation and higher interest rates.
The business recently declared its FY23 annual dividend, which was 2% higher than FY22. The 10.2 cents per share payment equates to a grossed-up dividend yield of 13.6%.
Foolish takeaway
I don't know what dividends these two businesses are going to pay in FY24. It could really depend on how the Australian economy performs.
Of the two, I'd probably want to own Step One over Shaver Shop because the underwear retailer is working on global growth, which gives it a longer growth runway. I also think the ethical and sustainable practices that have gone into Step One's products could become more popular in the coming years, in the same way ESG investing has become more popular.
