There are a few ASX shares out there offering good dividend yields today, which I believe could grow significantly in the next few years.
Last week, the United States Federal Reserve cut the US interest rate — arguably the most important interest rate in the world — by 50 basis points (0.50%).
With Australian inflation stronger than the US and the Australian job market still very strong, it seems unlikely that the Reserve Bank of Australia (RBA) will cut rates here in 2024.
However, the RBA will want to cut interest rates next year if it can. When Australian rates are reduced, I think the two ASX shares below could benefit significantly.
Adairs Ltd (ASX: ADH)
Adairs is a furniture and homewares retailer with three businesses – Adairs, Mocka and Focus on Furniture.
The company has been struggling with lower demand for its products in the current economic environment. This is not surprising, considering many households have less money to spend during this period of elevated inflation and high interest rates.
An interest rate cut could help increase demand for Adairs' products and lead to a resurgence in profit for the ASX share.
Don't forget, the RBA's rate hikes were intended to decrease overall demand in the economy. And it's working.
Broker UBS predicts that Adairs could generate $36 million of net profit in FY25 and this could increase to $44 million in FY26. If that happens, it would put the current Adairs share price at under 8x FY26's estimated earnings.
That level of profit – which would still be lower than FY22 – could fund an annual dividend payment of 18 cents per share in FY26. That would give Adairs a grossed-up dividend yield of more than 13% in FY26, according to UBS.
Nick Scali Limited (ASX: NCK)
Nick Scali is a similar company, though it's more focused on furniture retailing. After an acquisition, it now operates three businesses as well — Nick Scali, Plush, and (currently named) Fabb Furniture in the United Kingdom.
While it may not be the best-performing retail ASX share right now, I would say it's attractive because of the high return on equity (ROE) it achieves each year. Nick Scali only spends shareholder money on stores/acquisitions it thinks it can make good returns on.
Expansion in the UK is an exciting opportunity because of how much larger the population is there compared to Australia.
All Nick Scali needs to do is keep selling appealing products, open more stores that make sense and benefit from the growing scale. I think the business can open dozens of stores across Australia and the UK with its Plush and UK businesses.
According to Commsec, the ASX share is projected to pay a grossed-up dividend yield of 6% in FY26.
