14% dividend yield! Should I buy this ASX 200 share for passive income?

An ASX dividend share offering a yield of over 14% is enough to catch almost any investor’s eye. After all, a yield that is almost triple what you can get from a typical savings account or a term deposit is a fine opportunity. Especially considering inflation is running at a hot 8% or so at the moment.

So let’s check out the Smartgroup Corporation Ltd (ASX: SIQ) share price today and see if this 14% dividend yield is worth a second look.

Smartgroup is an ASX 200 share that offers employee management services. Think salary packaging, vehicle leases, and payroll administration.

So let’s get right to it. Smartgroup has a fairly impressive record when it comes to paying out dividends. Back in 2015, this company’s maiden annual payout came to 14 cents per share. But by 2021, Smartgroup was forking out 49.5 cents per share.

And 2022 was a record year for payouts. For one, investors received a final dividend of 19 cents per share, fully franked, on 23 March this year. This was followed by an interim dividend of 17 cents per share, also fully franked, in September. That brought the annual total to 36 cents per share for 2022.

This alone would give Smartgroup a trailing dividend yield of 7.58% on the current share price of $4.75 (at the time of writing). That’s 10.82% grossed up with the full franking.

SIQ yield

But Smartgroup wasn’t done with those two payments in 2022. The company also paid out a special dividend this year. In conjunction with the March final dividend, Smartgroup also doled out a fully franked special dividend worth another 30 cents per share. This took its annual total for 2022 to a whopping 66 cents per share.

If we take this figure instead, we get to a trailing dividend yield of 13.89%. That’s a massive 19.84% grossed-up with full franking.

So is this too good to be true?

Let’s dig in.

This stupendously large trailing dividend yield comes from the payment of the special dividend.

Now Smartgroup, when announcing this special dividend, didn’t really state how it was funded or why management chose to pay it out. But due to its ‘special’ nature, it could be optimistic to assume it will be a regular feature of Smartgroup’s earnings.

Saying that, Smartgroup has paid out a special dividend before. In fact, it did so in both 2019 and 2021, as well as 2022.

As we discussed earlier, it has also been fairly steady in delivering annual dividend pay rises to investors as well.

Additionally, the company seems to be in rude financial health. in its last annual earnings report (covering 2021), which was delivered in February, Smartgroup declared a 3% rise in revenues and a 7% lift in net profits after tax, adjusted for amortisation.

Operating earnings before interest, tax, depreciation, and amortisation (EBITDA) were also up 8% over the previous year.

Is Smargroup well placed to continue its massive dividends?

So in light of this growth, it’s very possible that Smartgroup can continue to afford to fund its dividends at 2022’s levels going forward. That’s especially so if its full-year numbers for 2022 are even better than those delivered for 2021.

Dividend payments are never guaranteed on the ASX. But there are few warning signs we can point to that indicate Smartgroup is not in a position to build on the impressive dividends it has paid out this year.

The post 14% dividend yield! Should I buy this ASX 200 share for passive income? appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. 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 positions in and has recommended SMARTGROUP DEF SET. 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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