ASX income investors: Should you buy Fortescue or Wesfarmers stock now?

Is retail or mining a better bet right now?

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ASX income investors may be interested in both Wesfarmers Ltd (ASX: WES) and Fortescue Metals Group Ltd (ASX: FMG) shares. But which would be the better buy right now? I'll try to answer that question.

I'd call both of these ASX shares blue chips, as they're two of the biggest and strongest companies in Australia.

Wesfarmers is the owner of several leading retail brands including Bunnings, Kmart, and Officeworks. It also has other prominent brands including Priceline, Target, Catch, Wesfarmers chemicals, energy and fertilisers (WesCEF) and several other industrial businesses.

Meantime, Fortescue is one of the largest ASX mining shares. Specifically, it's an ASX iron ore share. It also has a growing presence in the green hydrogen, green ammonia, and battery space.

I'm going to consider three factors.

Which ASX income share offers the biggest yield?

The companies' past dividend payments are history. Instead, let's focus on what the FY24 payouts might be, according to projections on Commsec.

In FY24, Wesfarmers is forecast to pay an annual dividend per share of $1.91. This would be a grossed-up dividend yield of 5.1%.

Turning to Fortescue, the ASX mining share is projected to pay an annual dividend per share of $1.38 in FY24. That would be a grossed-up dividend yield of 8.3%.

Based on the current share prices and projections, it's clear that Fortescue could pay a larger yield. However, there's more to being a good ASX income share for investors than just the next 12 months.

Which direction is the dividend going?

Owners of Fortescue stock have been getting big dividends for a few years now. But the payouts aren't as large as they used to be. The ASX mining share generates its profit based on how much iron ore it produces and, more particularly, on what the iron ore price is.

The Fortescue dividend per share roughly halved from FY21 to $1.75 per share in FY23, with a further decline expected in FY24 to $1.38 per share.

This compares to the Wesfarmers dividend which has increased each year since FY20. Between FY20 to FY23, the dividend has risen 12% for owners of Wesfarmers stock.

This steady rise is giving Wesfarmers shareholders a good level of consistency.

It's possible the Fortescue dividend may rise again, particularly if the iron ore price rises from here. However, I wouldn't expect Fortescue's FY21 dividend to be repeated for a long time while the company is investing heavily in developing green energy and while the iron ore price sits below US$150 per tonne.

Which ASX income share is better value?

I think it can be a bit deceptive to look at the price/earnings (P/E) ratios of ASX mining shares, so I'm not going to compare the two blue chips. ASX mining shares normally trade on a lower P/E ratio compared to other sectors, but the profit bounces around so much that it's often not a useful metric to tell if it's a good time to buy.

To deliver a good capital return, I prefer to invest in ASX iron ore shares when the iron ore price is low, typically under US$100 per tonne. The iron ore price is currently at around US$130 per tonne according to Trading Economics. That's good for Fortescue's stock, profit, and dividends, but I'd wait to invest as an ASX income investor.

All in all, I think now is a much better time to look at Wesfarmers stock as it invests in non-retail sectors such as healthcare and lithium.

Motley Fool contributor Tristan Harrison has positions in Fortescue Metals Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. 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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