Guess which ASX 200 stock is predicted to pay an 8% dividend yield in 2025

Metcash Ltd (ASX: MTS) shares could be a pleasing payer of dividends over the next few years. The S&P/ASX 200 Index (ASX: XJO) stock is projected to pay a big dividend yield for the foreseeable future.

The company is best known for supplying IGA supermarkets around Australia, as well as Cellarbrations, The Bottle-O, IGA Liquor, Duncans, Thirsty Camel and Porters Liquor. It also owns a number of hardware brands including Mitre 10, Total Tools and Home Timber & Hardware.

Big dividends ahead?

The Metcash share price has fallen 11% over the past year and 24% from April 2022. This lower valuation means it’s cheaper, but it also has a boosted dividend yield. If a business with a 6% dividend yield sees a 10% share price fall, the yield becomes 6.6%.

It has committed to a dividend payout ratio of 70% of underlying net profit after tax (NPAT).

This is the sort of business that can see fairly consistent profitability, particularly the food and liquor divisions. While the profit may not go down that much, those two segments are not exactly fast-growth areas either.

However, I think the hardware division is capable of seeing pleasing profit growth, particularly once demand increases/recovers for construction and renovation.

With that in mind, the current projection on Commsec for Metcash’s FY25 annual dividend is 20.5 cents per share, which translates into a grossed-up dividend yield of 8.1% after generating 29.2 cents of earnings per share (EPS).

It’s projected to pay an annual dividend per share of 20.2 cents in FY24, which would be a grossed-up dividend yield of 8%.

The ASX 200 stock might pay an annual dividend per share of 21.3 cents, which would be a grossed-up dividend yield of 8.4%, according to the Commsec projection.

Earnings growth from the ASX 200 stock

I wouldn’t buy an ASX dividend share just because of a large dividend yield, as appealing as that might be.

There’s not much point in getting a 10% dividend yield return if the share price drops 20%.

A low price/earnings (P/E) ratio and potential earnings growth make me believe Metcash is a good, relatively low-risk investment. Australian population growth and expansion of its business can help the company grow earnings in FY25 and FY26 (after working through the likely hardware profit decline in FY24). The current projections on Commsec suggest a bit of earnings growth in FY25 and FY26.

The Metcash share price is valued at 12 times FY25’s estimated earnings.

The post Guess which ASX 200 stock is predicted to pay an 8% dividend yield in 2025 appeared first on The Motley Fool Australia.

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More reading

• A once-in-a-decade chance to get rich from ASX 200 shares?
• 3 Australian value stocks to buy right now
• 2 ASX shares under $50 new investors can buy confidently
• Are Metcash shares worth buying for that fat 6% dividend yield?
• 3 ASX shares that could soar thanks to the RBA

Motley Fool contributor Tristan Harrison has positions in Metcash. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Metcash. 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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