Many ASX income stock dividend yields have jumped higher amid the higher interest rate environment. While investors can get a better return from savings accounts these days, the yields on offer look too good to ignore.
When share prices fall, it means we can buy businesses at a cheaper valuation. It has the bonus effect of pushing up the yield on offer. For example, if a business has a 6% dividend yield and the share price drops 10%, the yield becomes 6.6%!
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Why do interest rates matter?
Legendary investor Warren Buffett once explained the importance of interest rates very well:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
With that in mind, these two ASX income stocks trading at lower prices look exciting for income investors.
Charter Hall Long WALE REIT (ASX: CLW)
This is a real estate investment trust (REIT) that owns a variety of different properties, all of which are on long leases.
Let's start with the potential income. The business has guided that it's going to pay a distribution per security of 26 cents, which translates into a forward yield of 7.2%.
The ASX income stock has a weighted average lease expiry (WALE) of 11 years and an occupancy rate of 99.9%, so it's generating a lot of long-term rental income, which is good for investors wanting stable income.
Its properties include telecommunications exchanges, service stations, high-quality office and retail, Bunnings buildings, logistics and so on.
Around half of its leases are linked to CPI inflation, while the other half of leases have (for FY24) a fixed 3.1% rental increase. This creates a solid growth rate of the rental income for the company, helping offset the higher debt cost.
Metcash Ltd (ASX: MTS)
Metcash supplies many independent retailers with food and drink. Its customers include IGA, Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop and Duncans.
What excites me most is the hardware division which owns brands including Mitre 10, Home Timber & Hardware and Total Tools. It also supports independent operators under the small format convenience banners Thrifty-Link Hardware and True Value Hardware.
The company is committed to a dividend payout ratio of 70% of underlying net profit after tax (NPAT). According to Commsec, the ASX income stock is expected to pay a grossed-up dividend yield (including franking credits) of 8.2% in FY24.
I believe the food and liquor divisions offer defensive earnings which can help fund its large dividend. The hardware division faces the most headwinds in the short term because of the wider economy, but a reduction of interest rates could reignite stronger demand in 2025 or 2026.
