S&P/ASX 200 Index (ASX: XJO) shares can be some of the best choices for passive income for retirees, thanks to the combination of a good dividend yield (helped by franking credits) and stability. I think the business Medibank Private Ltd (ASX: MPL) is one such opportunity at the larger end of the ASX share market.
Medibank is the largest private health insurer in Australia, with its Medibank and ahm brands, as well as a number of additional healthcare businesses.
Healthcare is a defensive sector that can provide resilient earnings for the company – people don't choose when they need healthcare. Medibank is a good way to take a diversified approach to the sector without being overly exposed to any one service or treatment.
I think Medibank's earnings are resilient and offer solid growth potential, which is the foundation for good dividends.
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Dividend potential of the ASX 200 share
If I were a retiree, I'd want to own investments that I had a high degree of certainty that wouldn't cut my passive income. If the payments are being increased, then they obviously aren't being cut.
Medibank has increased its annual dividend per share each year since 2020 (which was affected by COVID-19 impacts). In fact, over the past decade, 2020 was the only year that the business implemented a dividend cut – in every other year it has hiked the payout.
In FY25, the ASX 200 share paid an annual dividend per share of 18 cents. That translates into a grossed-up dividend yield of 5.5%, including franking credits.
But, the past is the past. The next dividends are more important for retirees.
The projection on Commsec suggests the ASX 200 share could increase its payout to 20.2 cents per share, representing a year-over-year increase of 12.2%. That potential increase, translates into a grossed-up dividend yield of 6.25%, including franking credits.
The forecast on Commsec shows that the annual payout could grow by another 6.4% year-over-year to 21.5 cents per share. That would be a grossed-up dividend yield of 6.6%, including franking credits. That'd be a great yield for retirees, in my opinion.
So, ultimately, analysts are expecting the business to continue delivering investors rising passive income.
Rising earnings predicted
The most important thing to fund dividends is profit generation by the ASX 200 share.
Medibank has seen ongoing growth over the years of its Australian resident and non-resident policyholders, which is a strong tailwind for earnings. The acquisitions it has made in recent times add to its earnings power and diversify its profit base.
The prediction on Commsec suggests the business could generate earnings per share (EPS) of 24.9 cents in FY26 and then increase EPS to 26.3 cents in FY27.
That means it's now trading at less than 19x FY26's estimated earnings, which looks like an appealing valuation to me.
