Almost ready to retire? I'd buy cheap ASX dividend shares for income

Retirees can boost their cash flow with dividend stocks.

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Cheap ASX dividend shares could be exactly what someone about to retire could benefit from. There are lots of ASX shares paying good passive income.

I'm not going to say that investors should go for a large ASX bank share like Commonwealth Bank of Australia (ASX: CBA) or ANZ Group Holdings Ltd (ASX: ANZ). The banking sector faces the possibility of rising arrears and heightened competition for the foreseeable future. I prefer other stocks.

There are some great businesses on the ASX, but they don't always reflect the underlying value of the business.

I like the idea of being able to buy a share that's worth $1 for 80 cents (or less). Of course, dividends are not guaranteed payments, and share prices do move down. But in my mind, volatility can open up some appealing investments.

Don't forget franking credits

Owning Australian companies comes with the added bonus of franking credits, which are refundable tax credits. Receiving fully franked dividends can boost the after-tax dividend returns.

For example, receiving $70 of fully franked dividends means that's $100 of grossed-up dividend income.

A 7% fully franked dividend yield becomes 10%, grossed up.

A 3.5% fully franked dividend yield becomes 5% when grossed up.

For an Aussie or superannuation fund with a 0% tax rate, it's a very helpful boost to annual cash flow after completing the tax return.

Where are there cheap ASX dividend shares?

Share prices are always changing, so that can alter what dividend yield we're going to receive and change the 'value' on offer.

For me, there are a few different categories and industries I like to monitor.

I like to look at cyclical ASX shares when they're at a weaker point in the cycle, such as ASX mining shares and ASX retail shares. Last year and 2022 were great years to go hunting for ASX retail shares, while the last quarter of 2021 was a good time to look at ASX iron ore shares such as Fortescue Ltd (ASX: FMG) and Rio Tinto Ltd (ASX: RIO).

I'm a big fan of businesses that have a track record of consistently growing their dividend payouts. This shows those ASX dividend shares want to look after their shareholders, and they can provide some protection against inflation.

Finally, I like looking at businesses with relatively high dividend yields, if there is a good prospect they can deliver revenue growth, underlying profit growth and increase the value of the business over time.

I'll talk about two examples.

Rural Funds Group (ASX: RFF) is a real estate investment trust (REIT) that owns a farm portfolio across Australia, including almonds, cattle, macadamias and vineyards.

In the FY24 first-half result, the business said it had an underlying net asset value (NAV) of $3.07 (an increase of 4.8%). The Rural Funds share price is at a 32% discount to this NAV, making it seem like a very cheap ASX dividend share.

It's currently paying an annualised distribution yield of 5.6%.

Telstra Group Ltd (ASX: TLS) is the market-leading telco in Australia, with the biggest customer base and the mobile network with the most coverage.

It continues to win new mobile subscribers and this is helping drive the Telstra profit dividend higher. It currently offers an annualised grossed-up dividend yield of 6.8%. It looks cheap to me because the Telstra share price is at a 52-week low.

Motley Fool contributor Tristan Harrison has positions in Fortescue and Rural Funds Group. 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 positions in and has recommended Rural Funds Group and Telstra Group. 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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