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

Is retail or mining a better bet right now?

| More on:
A senior couple discusses a share trade they are making on a laptop computer

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

More on Dividend Investing

A little girl holds on to her piggy bank, giving it a really big hug.

2 top ASX dividend stocks to buy and hold forever

Here are two companies I'd buy shares in to keep the income up instead of holding cash.

Read more »

Woman calculating dividends on calculator and working on a laptop.
Dividend Investing

Buy NAB and these ASX 200 dividend stocks

Analysts are saying good things about these income options.

Read more »

ETF written on cubes sitting on piles of coins.

The rise of dividend ETFs in Australia: A new era of investment

Dividend ETFs can be great, but make sure you watch out for these key indicators.

Read more »

Smiling woman holding Australian dollar notes in each hand, symbolising dividends.

2 ASX dividend stocks I'll be buying hand over fist in 2024

These two shares are on the top of my 2024 wish list.

Read more »

A senior investor wearing glasses sits at his desk and works on his ASX shares portfolio on his laptop2
Dividend Investing

3 ASX All Ords shares with ex-dividend dates next week

You'll need to get a wriggle on if you want to receive these dividends.

Read more »

Woman holding $50 notes and smiling.
Dividend Investing

3 ASX dividend stocks to solve your income needs

These dividend shares have been given the thumbs up by analysts.  

Read more »

A couple calculate their budget and finances at home using laptop and calculator.
Dividend Investing

Passive income: How much should you invest to earn $5,000 in annual ASX dividends

When it comes to passive income, I prefer ASX 200 shares with a reliable track record of making regular, fully…

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Which major ASX energy share will pay the best dividend yield in FY24?

And are ASX energy shares usurping mining and banking stocks when it comes to dividends?

Read more »