Should you buy this ASX dividend stock for its 12% yield?

The dividends from this stock are expected to be huge.

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Shaver Shop Group Ltd (ASX: SSG) is a compelling ASX dividend stock that is expected to pay big dividends in the coming years. Those payouts could lead to a grossed-up dividend yield, which includes franking credits of more than 10%.

Considering the global share market has returned an average of around 10% per annum, getting that level of return from just the dividends could be very appealing (if the share price doesn't go down over the long term).

How big is the Shaver Shop dividend going to be?

Shaver Shop paid an annual dividend per share of 10.2 cents in FY23. It has increased its dividend each year since 2017 when it first started paying a dividend.

The current estimate on Commsec suggests the business could pay an annual dividend per share of 10.3 cents, which would be a cash yield of 8.7% or a grossed-up dividend yield of 12.5%. That would be a huge yield, but at this stage, it's just a forecast.

The dividend per share is forecast to be 10.4 cents in FY25, which would be a grossed-up dividend yield of 12.6%.

Shaver Shop's dividend per share is forecast to jump in FY26 to 10.9 cents, which would be a grossed-up dividend yield of 13.2%!

Let me reiterate, analyst estimates are not guaranteed to happen.

Why is the ASX dividend stock's yield so big?

I'd point to two reasons why this company is projected to pay such a large yield.

First, the dividend payout ratio is high, in FY24 it's expected to be 86.5%. While that's generous, it would also leave a little bit of profit in the business to re-invest for growth and/or improve the balance sheet.

Second, the business trades on a low multiple of its earnings, with a low price/earnings (P/E) ratio. While a low P/E ratio isn't necessarily a good sign, it does have the effect of boosting the dividend yield. Retail businesses tend to trade on lower earnings multiples, compared to other sectors like ASX tech shares.

According to the estimate on Commsec, the Shaver Shop share price is valued at 10 times FY24's estimated earnings.

Can the payout be maintained and keep growing?

I believe that demand for shaving products could remain fairly consistent – our body hair keeps growing, whether we want it to or not.

Pleasingly, a large amount of Shaver Shop's earnings come from exclusive products, which means customers have to shop there if they want that particular product.

The ASX dividend stock can keep growing its network of stores, which can support total sales, even if same-store sales are challenged during 2024.

It is also growing its digital presence, with an expanded social media presence and a recent launch on TikTok. In the first four months of FY24, just over a fifth of its total sales were online.

If the profit can be stable and grow over time, then there's a good chance the dividend can rise as well.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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