Undervalued high-yield ASX dividend stocks could be excellent picks for passive income. It's great to be rewarded for simply owning businesses that deliver dividends every reporting period.
A dividend yield is decided by two factors: a company's valuation and how much of its profit it's paying out. The higher the earnings multiple or price/earnings (P/E) ratio, the lower the dividend yield.
If the share price of a high-yield ASX dividend stock falls, it pushes up the dividend yield. This means bear markets can be a great time to pick up opportunities — not only are we buying shares in ASX companies at a better valuation, but the yield becomes larger.
For example, if a business had a dividend yield of 5% and then the share price fell 20%, the dividend yield would become 6%. This is why the lower prices of the two companies below appeal to me.
Nick Scali Limited (ASX: NCK)
Nick Scali is one of the larger furniture businesses on the ASX. It owns three different brands: Nick Scali, Plush, and Fabb Furniture.
Fabb Furniture may not be a recognisable name to many Aussies because it's a furniture retailer in the United Kingdom, which the ASX dividend stock recently acquired.
I think this company is a good one to invest in right now, partly because the Nick Scali share price has dropped around 15% since 1 October. ASX retail shares tend to be somewhat volatile because of changing expectations about how much profit a company may make in different economic conditions. However, retailers can be compelling investments when they're sold off.
The RBA interest rate remains high, making it challenging for some households to spend on certain discretionary categories such as furniture. But conditions could start improving in the next year or two as inflation falls and interest rates (hopefully) start coming down.
I'm excited by how many more Nick Scali and Plush stores the ASX dividend stock could add in Australia. Meanwhile, the Fabb Furniture business could grow significantly in the UK because the population is much larger.
Increased scale for Nick Scali could significantly increase margins and profitability in the coming years.
Based on its FY24 payout of 68 cents per share, the high-yield ASX dividend stock has a grossed-up dividend yield (including franking credits) of 6.9%.
Transurban Group (ASX: TCL)
Transurban is a large toll road owner, operator, and developer with toll roads in Sydney, Melbourne, Brisbane, and North America.
The business has benefited from inflation in the last few years, which has increased the price of tolls. However, the Transurban share price is down 8% since 13 September.
The ASX dividend stock continues to see rising average daily traffic (ADT) on its roads. In the three months to 30 September 2024, Transurban reported that its group ADT rose 1.1%, Sydney ADT increased 1.9%, Melbourne ADT went down 1%, Brisbane ADT increased 1.3%, and North American ADT climbed 6.5%.
The growth of traffic and tolls combined is helping increase the ASX dividend stock's payouts, as well as the investments it's making in increasing the size of its road network.
Transurban expects to grow its FY25 distribution per security by 4.8% to 65 cents, which currently translates into a distribution yield of 5.1%.
