Owning Wesfarmers Ltd (ASX: WES) shares for dividends is a good tactic because of its long-term history of payouts and the board's commitment to growing the passive income.
But, there's more to being a good ASX dividend share than simply paying a dividend. Ideally, it offers a good dividend yield which can also grow thanks to the ability of companies to re-invest their profits into growing their operations.
Wesfarmers has done a wonderful job of growing Bunnings, Kmart and Officeworks into the businesses they are today. Those retail businesses and other Wesfarmers subsidiaries are responsible for paying some of the biggest dividend payouts in Australia.
Passive income payout
To work out what the dividend yield is, we first need to know what the Wesfarmers dividend is.
The last two dividend payments from the business amount to $1.94 per share. However, that's the trailing two dividends. How much could the next two dividends be?
The estimate on Commsec suggests the Wesfarmers dividend per share could be $1.95 for FY24, while the FY25 payout could be $2.16 per share (which would be a year over year increase of 7.7%).
Wesfarmers dividend yield
To calculate the dividend yield, we divide the dividend by the Wesfarmers share price. To get to the grossed-up dividend yield, we add the franking credits.
At the current Wesfarmers share price, the FY24 grossed-up dividend yield could be 4%.
If we look ahead to FY25, the company could pay a grossed-up dividend yield of 4.4%.
These aren't the biggest yields in the world, but it means investors are getting a yield that's competitive with savings accounts, while also offering organic growth.
Plus, the business is projected to retain a sizeable amount of profit each year to re-invest for more growth and hopefully grow the dividend in future years.
In FY24, the business is projected to have a dividend payout ratio of 86% in FY24 and 88% in FY25. If the company paid a 100% dividend payout ratio, it would have a grossed-up dividend yield of 4.6% in FY24 and 5% in FY25.
Are dividends everything?
For Wesfarmers, the dividend hasn't been the key part of the returns. It has been capital growth.
According to CMC Markets, Wesfarmers shares have generated an average total shareholder return of 14.1% per annum over the past decade, compared to 7.7% for the Vanguard Australian Shares Index ETF (ASX: VAS) over the same period.
Time will tell what the future Wesfarmers dividends will be, but the future is promising with the strength and value of the consumer offering from the key businesses of Bunnings and Kmart.
