Some S&P/ASX 200 Index (ASX: XJO) shares can be excellent sources of dividends, thanks to a mix of appealing valuations and generous dividend payout ratios.
Big businesses like Commonwealth Bank of Australia (ASX: CBA) and Wesfarmers Ltd (ASX: WES) do pay dividends, but their strong share price performance has compressed the dividend yields.
If I were investing for passive income, I'd want a good starting yield and good prospects of further dividend growth. CBA shares aren't the sort of investment I'm looking for as a dividend investor because of their elevated valuation.
The first ASX 200 share we'll examine looks like a compelling ASX blue-chip for dividends, in my view. And I recently invested in the second. Let's dig in.
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Telstra Group Ltd (ASX: TLS)
Telstra is the leading telco in Australia. It has the most subscribers, the biggest network coverage and the most compelling spectrum assets.
I think the company is doing the right thing by investing in its 5G network to stay ahead of the competition, such as Optus and TPG Telecom Ltd (ASX: TPG) (which includes Vodafone).
With Telstra's network considered the best, it attracts and retains customers. Its leading market position allows the business to increase prices without a noticeable impact on customer numbers.
Growing subscriber numbers and rising mobile prices are powering the key mobile division's profit, so the outlook is promising for revenue, profit, and dividend growth.
According to UBS forecasts, in FY25 the ASX 200 share is expected to generate $23.9 billion of revenue and $2.15 billion of net profit after tax (NPAT). It will also pay a dividend per share of 19 cents.
On those numbers, the Telstra share price is valued at under 21x FY25's estimated earnings with a grossed-up dividend yield of 6.9%, including franking credits. It's projected to pay an annual dividend per share of 27 cents in FY29, which translates into a grossed-up dividend yield of 9.75%, including franking credits.
Centuria Industrial REIT (ASX: CIP)
I recently added this real estate investment trust (REIT) to my portfolio. The ASX 200 share looks both cheap and offers appealing passive income, in my view.
On the income side of things, the business generates rental profits from its national portfolio of industrial properties. It expects to generate rental profit (FFO – funds from operations) of 17.5 cents per security in FY25, meaning the current Centuria Industrial REIT share price is trading at under 17x FY25's estimated rental profits.
With those earnings, the ASX 200 share has guided a distribution per unit of 16.3 cents. This translates into a forward distribution yield of 5.6%.
I think it looks particularly cheap because, after a 30% fall in the share price since December 2021, it's now trading at a 25% discount to the June 2024 net tangible assets (NTA) per unit.
In addition, the REIT is benefiting from strong tailwinds for industrial properties. These include a growing population, increasing adoption of e-commerce and higher demand for data centres. This helped deliver a 6.5% increase in like-for-like net operating income in FY24.
I expect more rental income growth in the coming years thanks to those tailwinds and the limited amount of space in our large cities for well-located industrial properties.
