Building up income: 2 ASX dividend shares I believe are a buy

ASX dividend shares could be a good area to go hunting for investment income opportunities.

Businesses can decide to pay out a sizeable amount of their profit each year to investors. This way, shareholders get to enjoy ‘real’ cash returns each year while, hopefully, also benefiting from the long-term profit growth and capital growth of those companies.

While many of the biggest ASX shares are known for being dividend payers, there are other smaller businesses that could be better long-term picks in my opinion. This is because of their ability to grow. At the same time, some can also be rated as higher quality.  That’s because it’s much harder for a huge business to keep growing at a good pace due to its size to begin with.

That said, I think the following two ideas could be appealing income picks.

VanEck Morningstar Australian Moat Income ETF (ASX: DVDY)

This is an exchange-traded fund (ETF) based on a portfolio that aims to generate income from quality Australian companies.

The ETF is designed to track the performance of the 25 highest paying ASX dividend shares, excluding real estate investment trusts (REITs), that meet the fund’s required moat ratings and its ‘distance to default’ measures.

An “economic moat” is a way of describing a business’s ability to maintain its competitive advantages and defend its long-term profitability. Some moats include switching costs for customers, intangible assets (like brand power or patents), network effects, cost advantages, and efficient scale.

The Moat Income ETF has a management fee of 0.35% per annum. Some of its biggest positions include IPH Ltd (ASX: IPH), AUB Group Ltd (ASX: AUB), Ansell Limited (ASX: ANN), National Australia Bank Ltd (ASX: NAB), Medibank Private Limited (ASX: MPL), and Wesfarmers Ltd (ASX: WES).

Metcash Limited (ASX: MTS)

Metcash is a supplier to food and liquor shops around Australia. Indeed, it supplies more than 1,600 independently owned supermarket stores, including the IGA and Foodland brands.

In the company’s liquor division, it supplies brands such as Cellarbrations, The Bottle-O, IGA Liquor, Porters Liquor, Thirsty Camel, Big Bargain Bottleshop, and Duncans.

The business also has a hardware segment which includes Mitre 10, Home Timber & Hardware, and Total Tools.

Metcash has a target dividend payout ratio of 70% of underlying net profit after tax (NPAT). In FY22, it increased its dividend per share by 23% to 21.5 cents. It also recently completed a share buyback of $200 million.

At the current Metcash share price, the ASX dividend share has a FY22 grossed-up dividend yield of 7.7%.

In a trading update for the 17 weeks to 28 August, it said that group sales had increased 8.9% with growth in all pillars.

According to CMC Markets, Metcash is expected to pay a dividend per share of 22 cents in FY23. This would translate into a grossed-up dividend yield of 7.9%.

I think that Metcash can continue to grow its business over the longer term, particularly in its hardware division.

The post Building up income: 2 ASX dividend shares I believe are a buy 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 recommended IPH Ltd. The Motley Fool Australia has positions in and has recommended Wesfarmers Limited. The Motley Fool Australia has recommended Ansell Ltd., Austbrokers Holdings Limited, and IPH Ltd. 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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