I have viewed Wesfarmers Ltd (ASX: WES) shares as one of the best ASX dividend shares for a long time, both for the appealing passive income as well as the regular profit growth which helps fund larger payouts for investors.
While a lion's share of the profit is generated by Bunnings and Kmart, all of the business divisions are responsible for their part in helping the business fund its dividend. I'm referring to businesses like Officeworks, Wesfarmers chemicals, energy and fertilisers (WesCEF), and the healthcare segment.
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What makes Wesfarmers shares an attractive option for dividends?
Wesfarmers has a number of goals including driving long-term earnings growth, managing working capital effectively, having strong capital expenditure processes, investing for a bigger return than its cost of capital, having financial discipline, maintaining balance sheet strength, improving its returns on invested capital, and growing its dividends over time.
The company has a goal of delivering satisfactory returns to shareholders over time. Wesfarmers states:
With a focus on generating strong cash flows and maintaining balance sheet strength, the group aims to deliver satisfactory returns to shareholders through improving returns on invested capital.
As well as share price appreciation, Wesfarmers seeks to grow dividends over time commensurate with performance in earnings and cash flow. Dependent upon circumstances, capital management decisions may also be taken from time to time where this activity is in shareholders' interests.
How much passive income could a $5,000 investment generate in FY26?
With those pleasing words about a focus on dividend growth in mind, Wesfarmers is projected to deliver a larger payout in the 2026 financial year compared to FY25.
The forecast on CommSec suggests that the business could pay an annual dividend per share of $2.10 in FY26. At the time of writing, that translates into a grossed-up dividend yield of 3.7%, including franking credits.
If someone were to own $5,000 of Wesfarmers shares, that would translate into grossed-up passive income of around $185, including the bonus of the franking credits.
Different analysts have different projections for the business.
The forecast on CMC Markets suggests the business could deliver an FY26 annual dividend per share of $2.17, which would translate into a grossed-up dividend yield of 3.8%, including franking credits. That would turn into approximately $190 of grossed-up income for FY26.
Obviously, income investors would like to see as big a dividend yield as possible, but the business should also retain some profits to reinvest into opportunities to deliver further profit and dividend growth in the coming years.
I think Kmart (and Anko) is the most likely division to deliver strong profit growth from here for Wesfarmers because of the potential for more Anko products to be sold overseas (in North America and Asia). I'd be very happy to own Wesfarmers shares for the long term.
