Undervalued ASX dividend shares could be a great source of passive income.
At a time when interest rate cuts seem to be on the horizon, it could be a good idea to look at names that may be materially lower today than where they may be in a couple of years.
I'm not expecting 2024 to be the strongest, operationally, for the below two stocks, but I think the medium-to-longer-term is very promising.
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Scentre Group (ASX: SCG)
Scentre is a real estate investment trust (REIT) that owns Westfield shopping centres in Australia and New Zealand. It has 37 locations in Australia and five in New Zealand.
A few months ago, the business reported its quarterly update for the period ending September 2023.
It reported portfolio occupancy of 99.1%, up 30 basis points (0.30%), year over year. The ASX dividend share also said that the average specialty rent escalation had been 7.6% in the year-to-date. New rental contracts saw a 3.6% increase in the three months to September 2023.
Total business partner (tenant) sales within Scentre were 13.7% higher in the three months to September compared to the same period in 2019.
The ASX dividend share continues to invest in its shopping centres to renovate and improve them and unlock stronger rental potential.
While online shopping is a headwind, the growing population is a tailwind. Plus, the limited space for new shopping centres in cities means the business has a strong economic moat, in my mind.
It's forecast to pay a distribution of at least 17.8 cents per security in FY25 and 20.3 cents per security in FY26, which are forward distribution yields of 5.7% and 6.5%.
Dusk Group Ltd (ASX: DSK)
Dusk describes itself as the leading Australian omni-channel specialty retailer focused on home fragrance products. It has candles, ultrasonic diffusers, reed diffusers, essential oils, as well as fragrance-related homewares.
The Dusk share price has dropped 45% in the past year and it's down around 75% from July 2021. It's a lot cheaper than it was, reflecting the more difficult retail conditions.
The company's total sales for the first 20 weeks of FY24 were down 11.3% year over year, with bricks and mortar sales down 12.3% and online sales up 8%. Compared to the pre-pandemic period of FY20, total sales were up 30.1%. It reported it saw a slight improvement in sales trends from October onwards.
The ASX dividend share has continued to open new stores in Australia, opening six in the first half of FY24, which are located in "outer suburban and regional centres where the returns on investment remain attractive." It's expecting to open another four new stores in Australia in the second half of FY24 and close one store.
In December 2023 it expanded onto the Amazon marketplace.
FY24 could be tricky, with earnings expected to sink. The forecast numbers suggest earnings per share (EPS) of 7.2 cents and a dividend per share of 5.1 cents, which would imply a forward price/earnings (P/E) ratio of 14 and a forward grossed-up dividend yield of 7.3%.
But, the forecast is for a recovery in FY25 and FY26. Dusk could pay grossed-up dividend yields of 13.7% in FY25 and 16.6% in FY26.
