Cheap ASX shares are capable of paying very high dividend yields because of their cheap valuation.
Assuming a dividend cut isn't coming, a big potential yield can be very appealing because of how much it can contribute to total shareholder returns (TSR).
A lower price/earnings (P/E) ratio can push up the dividend yield. Both of the ASX shares in this article are trading with single-digit earnings multiples.
Adairs Ltd (ASX: ADH)
Adairs is a furniture and homewares retailer through the three businesses of Mocka, Focus on Furniture and Adairs.
The cheap ASX share has suffered in recent times amid the high cost of living situation, with households having less money to spend on discretionary items. However, the weak retail conditions probably won't last forever, which bodes well for the company with a potential earnings recovery in the next couple of years.
Remember that there are a lot more people in Australia than there were five years ago before COVID-19, so there are more potential customers when conditions improve. It's aiming to grow profit through opening new stores, upsizing some existing stores (which are more profitable), growing online sales and increasing its membership base.
Forecasts on Commsec suggest the company could generate 28.5 cents of earnings per share (EPS), putting the cheap ASX share at under 8x FY26's estimated earnings. This could fund an annual dividend per share of 19.8 cents in FY26, which would be a grossed-up dividend yield of 13.2%.
Lindsay Australia Ltd (ASX: LAU)
This business operates in the transport and logistics sector. It provides services to agriculture, horticulture and food-related industries. It can assist farmers to grow, package, transport and distribute their produce throughout Australia and globally.
The company's recent FY24 first-half result showed what the company is capable of, with operating revenue growth of 23.9% to $417.9 million, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) growth of 21.7% to $52.1 million and underlying net profit after tax (NPAT) growth of 13.9% to $19.6 million. This funded a 10.5% increase for the interim dividend to 2.1 cents per share.
The cheap ASX share is expecting full-year underlying EBITDA to grow by 13% in FY24 compared to FY23.
The Commsec forecast suggests the EPS and dividend could grow every year between FY24 and FY26. It suggests Lindsay shares are valued at just 6x FY26's estimated earnings with a possible grossed-up dividend yield of 9%.
