ASX income shares can provide a wonderful combination of both dividends and capital growth.
It's up to companies to decide what to do with their profit generation. Delivering some of the earnings to shareholders is an appealing outcome for investors who want passive income.
In considering businesses I'd want to own for dividends over the long term, I want to see a good track record of payments to shareholders, a strong market position/asset base and potential for more long-term growth.
A few names come to mind. At the current valuations, the two below are ones I'd be drawn to.
Transurban Group (ASX: TCL)
Transurban is an ASX income share I normally write about. However, following the strong rise of many stocks this year, I think the largest toll road business in Australia could be more appealing than many other opportunities.
Currently trading at $13.00, the Transurban share price is lower than its 2024 high of $13.13 and 10% lower than where it was five years ago.
A higher interest rate does impact the underlying value of an asset-focused business like Transurban, but I think the higher distribution yield (due to the reduction of the share price) makes up for it.
The company has provided guidance that it will grow its FY25 distribution by 4.8% to 65 cents per share. At the current Transurban share price, that prediction translates into a distribution yield of 5%. If the payouts can rise over time, that's a solid starting yield.
Any reduction in the interest rate by the RBA in 2025 could help boost Transurban's underlying value and cash flow.
Transurban's traffic volume continues to grow, which helps boost its earnings and increase its underlying value. In the three months to September 2024, Transurban's average daily traffic (ADT) increased by 1.1% year-over-year, Sydney ADT grew 1.9%, Brisbane ADT grew 1.3%, and North American ADT grew 6.5%, but Melbourne ADT declined 1%.
Over the long term, I think traffic growth and rising toll prices will help deliver pleasing income and capital growth.
Brickworks Limited (ASX: BKW)
Brickworks is probably best known for its various building products.
It is Australia's largest brickmaker, with brands including Austral Bricks, Bowral Bricks, Daniel Robertson, and Nubrik. It also offers other building products, including roofing (through Bristle Roofing), cement (Southern Cross Cement), masonry (Austral Masonry, GB Masonry, and UrbanStone), a specialised building system (Terracade), and timber (Capital Battens).
However, I'm most attracted to the ASX income share's other assets, valuation, and dividend record.
Brickworks is a large stakeholder in the compelling investment house Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), which is boosting its long-term dividends and capital growth.
Brickworks also has numerous property assets, including owning half of an industrial property trust, with tailwinds such as the growth of e-commerce and the onshoring of supply chains after COVID. This can help deliver rising rental profit over the long term.
In its FY24 result, the company reported an inferred asset backing of $35.79 per share when adding together the market value of its listed investments, property values, building product assets, and net debt. Currently trading at $27.68, the Brickworks share price is more than 20% below that inferred value.
The business has grown its dividend every year for the past decade, and it hasn't cut its payout for almost 50 years. Its FY24 payout represents a grossed-up (including franking credits) dividend yield of 3.5%.
