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Forget the ASX banks, buy these 2 ASX dividend shares for income

I believe there are ASX dividend shares that are a lot better than ASX banks for income.

2020 showed that bank dividends can be cut pretty heavily when a real recession happens. There were actually dividend cuts in 2019 from some banks as well. I just don’t think that the big banks are going to generate the same profit or pay the same dividends like they did in the past.

Instead, in my opinion there are other businesses which have much better growth potential and are more likely to be reliable dividend payers in the future:

Magellan Financial Group Ltd (ASX: MFG)

Magellan is a fund manager that has three investment strategies: international shares, Australian shares and infrastructure shares. The business has grown to have over $100 billion of funds under management (FUM). This generates an attractive amount of management fees for the company each year.

Growth of FUM helps the bottom line grow because fund managers are scalable, they don’t need to hold onto much capital to grow even more. Magellan is now at a size that it can have a dividend payout ratio of above 90% and it doesn’t impact growth, which is really useful for the dividend yield.

In FY20 it grew its normal dividend by 22% to 184.5 cents per share.

I think the profit and dividend can go higher just from the existing funds management business. Long term investment performance should organically grow FUM (and underlying profit), plus there is continuing fund inflows. In December alone Magellan experienced net inflows of $579 million.

Magellan also plans to launch a retirement product that could attract billions of FUM from people who want good retirement income from their superannuation.

Finally, Magellan’s profit and dividend could grow from its own principal investments in businesses like Barrenjoey and Guzman y Gomez.

Excluding special dividends, but including franking credits in the yield, Magellan has a trailing dividend yield of 4.9%.

MFF Capital Investments Ltd (ASX: MFF)

MFF Capital is a listed investment company (LIC) that is run by Chris Mackay, who is actually the co-founder of Magellan. Mr Mackay has well north of $100 million of his own money invested in MFF Capital shares, so he’s very aligned with existing shareholders.

The idea of the LIC is to invest in quality global businesses at attractive prices. At the moment it’s largely invested in US and a few Japanese businesses. Some of its top holdings include Visa, MasterCard, Amazon, Home Depot, Facebook, CVS Health, Bank of America, Berkshire Hathaway, Asahi, Itochu and Mitsubishi.

Over the past 10 years, it has been one of the top-performing LICs, not only because of its strong-performing portfolio but also because of how low its operating costs are.

The MFF board has a plan to increase the half-yearly dividend up to 5 cents per share, which would obviously make the annual dividend 10 cents per share. That means the MFF dividend yield, including the franking credits, would be 5.6% in the next couple of years, up from the trailing yield of 3.1%.

Other ASX dividend shares to think about that could be better than ASX banks include Brickworks Limited (ASX: BKW) and Premier Investments Limited (ASX: PMV).

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At the time of publishing, Jaz owns shares of MFF Capital.

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