Making the first $1,000 in passive income: These are the ASX shares I would buy first

A young woman wearing glasses and a red top looks at her laptop smilingA young woman wearing glasses and a red top looks at her laptop smiling

ASX shares have great potential to be able to deliver capital growth for investors. But I like that ASX dividend shares can deliver a pleasing stream of passive income through dividends.

Dividends, or distributions, are a simple way for a business to share some of its profit with investors.

There’s a cliché that says the first million dollars is the toughest to achieve.

I think we can say the same about dividend income. Making the first $1,000 of dividend income could be the hardest if starting from scratch.

However, I wouldn’t suggest thinking $1,000 is an end goal. Rather, I’d think of it as just a milestone.

Most investors have many more years to live, so I think it makes sense to target businesses that can provide a combination of a decent starting dividend yield and growth.

Earnings growth can enable investors to benefit from dividend growth and share price growth over time. In my opinion, it’s very helpful for the investment to help grow the dividend income.

With that in mind, I’d want to target these two names.

Lovisa Holdings Ltd (ASX: LOV)

Lovisa describes itself as a “fashionable on-trend jewellery and accessories specialist”. There are a number of reasons why I think this business has a compelling future.

For starters, I don’t think young shoppers are going to be as affected by a possible economic downturn as other age groups.

Lovisa is rapidly growing its geographic presence, with very profitable stores. In the FY23 first half, it added 86 net new stores to its portfolio, ending the period with 715 stores. By the date of the result release, it had 746 stores.

The ASX dividend share has recently entered a number of new markets including Italy, Poland, Hungary, Romania, Canada, Hong Kong, and Mexico. Each of these markets can turn into important earnings generators. It’s also growing rapidly in the US, a huge potential market for the business.

HY23’s net profit after tax (NPAT) jumped 31.9% to $47.7 million. Using its last two dividends, it has a grossed-up dividend yield of 4.5%. By FY25, it could pay an annual dividend per share of 95 cents according to Commsec, which (if fully franked) would be a grossed-up dividend yield of 5.7%.

Universal Store Holdings Ltd (ASX: UNI)

Universal Store also focuses on younger shoppers so I think it could be another business that’s more resilient than expected.

The company describes itself as owning a portfolio of “premium youth fashion brands and omnichannel retail and wholesale businesses”. Its main businesses are Universal Store and the THRILLS brand, and it’s also trialling the Perfect Stranger brand as a standalone retail concept. It has 93 stores, as well as e-commerce options for customers.

The ASX dividend share’s half-year result included a number of positives, including a 31.7% increase in statutory net profit after tax, while the interim dividend was increased by 27%.

During the period, it added another six new stores, combined with 10 acquired THRILLs stores. The Perfect Stranger trial “continues to perform”, with national expansion plans now “in play”.

It’s planning to open another four to six additional Universal Stores in the second half of FY23, along with three or four Perfect Stranger stores and one new THRILLs store.

The last two dividends amount to a grossed-up dividend yield of 6.3%.

By FY25, according to Commsec, it could pay a grossed-up dividend yield of 9%.

The post Making the first $1,000 in passive income: These are the ASX shares I would buy first appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa. The Motley Fool Australia has recommended Lovisa. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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