The All Ordinaries Index (ASX: XAO) stock Metcash Ltd (ASX: MTS) might be a smart choice to choose for dividends.
Metcash usually has a very attractive dividend yield because of its commitment to paying a relatively high dividend payout ratio. The business' policy is to pay out 70% of its underlying net profit after tax (NPAT) to shareholders as a dividend.
It also usually has a low price/earnings (P/E) ratio as well, which also helps it have a good dividend yield. The projection on Commsec suggests that it's valued at 12.5 times FY24's estimated earnings.
I like the diversification of the Metcash business, with its liquor, food and hardware pillars. It supplies IGA supermarkets, and it owns the brands of hardware businesses Mitre 10, Total Tools and Home, Timber & Hardware.
Regular investment idea
The Metcash share price is currently sitting at around $3.75. Buying 100 shares a week, or around 400 Metcash shares a month, wouldn't take a lot of capital – perhaps around $1,500 per month.
The company is currently projected to pay an annual dividend per share of 21 cents in FY24, though there's a chance the payout could be more than that from the ASX All Ords stock.
By purchasing 400 Metcash shares each month, investors would be able to get $84 of cash dividends and $120 per month of grossed-up dividend income including the franking credits.
In less than nine months of buying Metcash shares, it would soon be paying an annual grossed-up dividend income of over $1,000.
If we just look at the cash dividend side of things, it would take 12 months – a year – of investing to get to $1,000 of annual cash dividend income.
Is it a good time to invest in this ASX All Ords stock?
I think Metcash has a defensive earnings profile and could be well-suited to perform even if there is an economic downturn. It's not as though people are going to stop eating or need more houses built. The company's sales and earnings could keep growing as Australia's population grows.
If we look at its trading update for the 18 weeks to 3 September, the ASX All Ords stock said that total sales had increased by 1.7%, with all pillars delivering sales growth.
The most profitable business, the total hardware sales increased 3.2%, while sales from Total Tools rose 23.1%. I think it's a good sign for the company's FY24 net profit if the hardware division can keep delivering growth.
Commsec projections suggest that Metcash's annual dividend per share could rise around 3% to 21.6 cents, which translates into a grossed-up dividend yield of 8.2%.
