In my eyes, Wesfarmers Ltd (ASX: WES) shares represent one of the best ASX 200 (ASX: XJO) dividend income opportunities.
I like to see a few different things when I look at a potential dividend investment, and I think Wesfarmers passes all of those tests.
Dividend yield and growth
For a business to qualify as a good income option, I believe that the dividend yield needs to be competitive (or better) than what we can get from term deposits.
We’re now into the 2024 financial year, so I’m going to use the forecast for FY24. On CMC Markets, the forecast annual dividend per share is $1.91, which equates to a fully franked dividend yield of 3.9% at the current Wesfarmers share price. The franking credits are a useful extra boost to the after-tax yield.
Something that term deposits don’t offer is ongoing potential dividend growth (aside from RBA interest rate changes). Wesfarmers is forecast to grow its dividend in FY23, FY24 and FY25. At the very minimum, dividend growth helps protect shareholders against inflation.
Optionality
Wesfarmers is a diversified company and it has the investment flexibility to invest in industries where it sees opportunities. It may be best known as the owner and operator of Kmart and Bunnings, but there are numerous other businesses involved, such as Officeworks, lithium mining operations, industrial businesses and, most recently, an expansion into healthcare with Priceline and InstantScripts.
With that underlying diversification and ability to keep diversifying, I think it will be able to future-proof itself for decades to come, giving Wesfarmers shares some defensiveness.
Good management and balance sheet
I don’t personally know the management team, but I think the long-term track record by the leadership is very good. Wesfarmers’ leadership strikes me as one of the most thoughtful in terms of looking after shareholders and being focused on the long-term. Part of that is maintaining a good balance sheet, which ensures the business can keep performing well in good times and rough times, as well as funding acquisitions like InstantScripts.
