Larger businesses may be priced a bit lower in an earnings multiple sense, boosting the dividend yield. Those ASX 200 shares may also have a relatively higher dividend payout ratio, also increasing the profit.
But I’m not just looking for businesses with yields. I also want to find companies with earnings growth potential, which gives them a good chance of a rising share price and capital gains.
Here are two ASX 200 shares to think about for income:
Metcash Limited (ASX: MTS)
With its national supply agreements with IGAs and independent liquor chains across the country, I think that Metcash’s food and liquor earnings are pretty similar to that of Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) – defensive and it has the potential for slow but steady growth over time.
But it’s the hardware segment of Metcash that is particularly attractive to me. It owns Mitre 10, Home Timber & Hardware and most of the Total Tools business.
The ASX 200 share has been working on a number of areas of its business to save costs, improve profit margins and be more efficient.
The hardware division is an attractive feature of Metcash. FY21 underlying EBIT grew 61.5% to $136 million, whilst sales increased 24.7%. That shows margins are growing nicely. In a trading update, Metcash said that hardware sales in the first 16 weeks of FY22 to 15 August 2021 were up 16.3% on FY21.
It recently increased its target dividend payout ratio from 60% to 70%. Shareholder dividends for the year increased 40% to 17.5 cents per share. The trailing FY21 fully franked dividend yield is 4.3%.
Magellan Financial Group Ltd (ASX: MFG)
Magellan is a growing fund manager that now has funds under management (FUM) of around $117 billion. That amount of FUM generous large amounts of revenue and profit.
If the business can just keep growing its FUM, it can make more fees and even higher profit. Higher margins can occur because it doesn’t take much (in expenditure terms) to manage an extra $1 billion of FUM.
In FY21, the ASX 200 share’s average FUM rose 9% to $103.7 billion, management and service fees revenue grew 7% to $635.4 million and the profit before tax and performance fees of the funds management business grew 10% to $526.6 million. That’s a very high profit margin.
With an average FUM of $103.7 billion in FY21, the fact the FUM is already $117 billion shows that the underlying fund management profit is likely to grow again.
I also like the investments that Magellan Capital Partners has been making like Guzman y Gomez and Barrenjoey which have long-term growth potential and also diversifies the underlying earnings.
In FY22, Magellan is expected to pay a partially franked dividend yield of 5.4% at the current Magellan share price. It aims to pay out between 90% to 95% of the fund management profits and of the annual performance fees.