This ASX dividend share is predicted to pay a 9% dividend yield in 2026!

This stock is paying big dividends, and even bigger payouts are potentially on their way!

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ASX dividend share Universal Store Holdings Ltd (ASX: UNI) might be a rewarding company to own for passive income.

Now, retail companies may not be an investor's first choice for dividend income, but they can trade on a low price/earnings (P/E) ratio and sometimes have a high dividend payout ratio, resulting in a high dividend yield.

Universal Store owns a number of premium youth fashion brands, including Universal Store, THRILLS, Worship and Perfect Stranger.

Here's why I think it should be on your dividend stock watchlist.

Rising dividend

Universal Store started paying a dividend in 2021 and has grown its annual payout each year since. In 2021, it paid an annual dividend per share of 15.5 cents; in 2022, 21.5 cents per share; and in 2023, 22 cents per share.

In the FY24 first-half result, Universal Store's board decided to increase its dividend per share by 18% to 16.5 cents.

This means the last two declared dividends amounted to a fully franked dividend yield of 5.1% and a grossed-up dividend yield of 7.3%. That's a lot stronger than the rates offered by term deposits.

Analysts expect Universal Store dividends to increase even further. Commsec forecasts that the ASX dividend share could pay an annual dividend per share of 28 cents in FY25 and 32 cents in FY26. This translates into grossed-up dividend yields of 8.3% in FY25 and 9.5% in FY26.

Dividend growth is not guaranteed, but the company has shown a willingness to keep hiking the payout. If profit can keep rising, then future dividends could be positive for shareholders.

Profit growth potential

One of the easiest ways for a retailer to grow profit is to increase the size of its store network. In the FY24 first-half period, it opened six new stores, including three new Perfect Stranger stores, two new Universal Stores, and one new THRILLS store.

The rollout of Perfect Stranger as a standalone retail format delivers strong performance. The ASX dividend share's total sales grew 8.5% in HY24, with Perfect Stranger sales soaring 59.7% to $6.6 million.

Not only is the scale of the business increasing, but its profit is increasing at a faster pace. I like to see that because the profit pays for dividends, and investors usually value a business based on profit generation and expectations.

The company's HY24 gross profit margin improved 80 basis points year over year to 59.7%. Statutory net profit after tax (NPAT) rose 16.7% to $20.7 million.

If we look at the longer-term valuation, the stock seems very compelling to me. The Universal Store share price is valued at just 10x FY26's estimated earnings. With a large forecast dividend yield and a low valuation, I think this ASX dividend share is a long-term buy for passive income.

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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