Overinvested in BHP shares? Here are two alternative ASX dividend stocks

These two stocks could be useful for income diversification.

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Owning BHP Group Ltd (ASX: BHP) shares is popular for passive income, but it's not the only ASX dividend stock that can provide a sizeable dividend yield.

The ASX mining share generates strong cash flow and usually decides on a generous dividend payout ratio, but we don't want to put all of our investment eggs in one basket. I think it's worthwhile owning a variety of businesses that can offer strong dividends.

I like BHP's commodity diversification, including iron ore, copper, and potash, and the two stocks below could be useful additions.

Coles Group Ltd (ASX: COL)

Coles is one of the largest supermarket businesses in Australia. We all need to eat, so I think the business is capable of producing defensive earnings. It could provide a more consistent earnings and dividend profile than BHP shares, in my opinion.

If I'm investing for passive income, ideally the payouts can continue even if there's an economic downturn.

The ASX dividend stock has managed to keep increasing its annual payout each year since it demerged from Wesfarmers Ltd (ASX: WES) and became its own business in late 2018.

The supermarket business continues to see solid sales performance – in the third quarter of FY24, supermarket revenue rose 5.1% to $9.06 billion. If it can continue growing at this pace, it could outperform Woolworths Group Ltd's(ASX: WOW) sales.

According to the estimates on Commsec, owners of Coles shares could receive a grossed-up dividend yield of 5.5% in FY24 and 6.7% in FY26.

Step One Clothing Ltd (ASX: STP)

Step One is a direct-to-consumer online retailer of 'innerwear'. Its exclusive range is, according to the company, "high quality, organically grown and certified, sustainable, and ethically manufactured innerwear".

I think the company offers a compelling product. There is a certain level of demand for 'greener' products in a world that aims for net zero emissions in 2050.

The company currently makes a majority of its revenue in Australia, but excitingly it's growing in the UK and the US, which are much larger markets. In the FY24 first-half result, UK revenue rose 38% to $14.6 million and US revenue increased 256% to $4.1 million. This helped total revenue increase 25.5% to $45 million in HY24.

The HY24 result also saw increasing profit margins, with net profit after tax (NPAT) rising by 34.7% to $7.1 million.

The ASX dividend stock is pursuing several growth initiatives, such as expanding its women's product lines, forming partnerships with retailers and organisations, entering the US market with its women's product lines, and diversifying its sales channels and marketplaces.

It currently has a grossed-up dividend yield of 8%, which is a solid starting yield, in my opinion.

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 positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Coles Group and Wesfarmers. 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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