Category: Stock Market

After soaring a whopping 194% over the last 12 months, Nvidia (NASDAQ: NVDA) stock has richly rewarded its near-term investors as it rides a wave of explosive demand for AI hardware. But so far, this industry has been more hype than substance, and Wall Street is beginning to notice. Let’s dig deeper into what the next year could have in store for Nvidia as hype fades and fundamentals start to play a bigger role.

Analysts are starting to sound the alarm

In late 2022 and early 2023, financial media was awash with grandiose visions for the future of AI. PwC expected it to add $15.7 trillion to the global economy by 2030. And Bloomberg Intelligence projected the market to be worth $1.3 trillion by 2032 as the new technology was applied to digital ads, software development, and other services. But now, some on Wall Street are beginning to sing a different tune.

In June, Goldman Sachs released a report suggesting that the roughly $1 trillion in capital expenditures (capex) expected to pour into AI hardware over the coming years may exceed the potential returns. And they have a point.

So far, most consumer-facing generative AI start-ups are generating significant losses. And over the longer term, free, open-source large language models (LLMs) could also commodify the technology, eroding the economic moats for early leaders. This would hurt Nvidia because if its software clients don’t profit from their AI investments, eventually, they will stop spending. But so far, there is no evidence of a slowdown.

The cracks haven’t appeared yet

The good news for Nvidia shareholders is that if the company faces impending doom, there are no signs of it yet. The chipmaker’s rocket-ship rally is still backed by incredible operational performance.

Second-quarter revenue doubled year over year to $13.51 billion, driven by a 171% increase in the data-center segment where Nvidia sells its highest-end graphics processing units (GPUs), like the H100 and A100 used to train and run AI algorithms. For now, supply seems to be outstripping demand. And the company’s gross margin increased from 64.6% to 70.1%, while its profits jumped 843% to $6.19 billion.

That said, the AI boom is getting a little long in the tooth. Over the next 12 months, Nvidia will face difficult comps as it tries to maintain growth against already high prior-year numbers. This could eat away at the stock’s valuation, which seems to be pricing in continued expansion. With a forward price-to-earnings (P/E) ratio of 49, Nvidia trades at a significant premium over the Nasdaq 100‘s forward estimate of around 30.

Is Nvidia stock a buy?

It can be tempting to bet on Nvidia because of its practically exponential stock-price growth and the recent 10-for-1 stock split which makes the $3.18 billion company look deceptively affordable. However, investors who buy now are very late to the party and run the risk of holding the bag if things go wrong.

Over the next 12 months and beyond, the AI industry may face a reckoning as hype begins to fade and consumer-facing applications struggle to show enough revenue and earnings potential to justify the industry’s spending on chips and other hardware. These challenges could put Nvidia’s valuation at risk. And investors may want to stay clear for now.

The post Where will Nvidia stock be in 1 year? appeared first on The Motley Fool Australia.

More reading

• Top 10 most traded ASX shares and US stocks in June
• ‘Defining trend this decade’: 6 tips for buying AI stocks
• Why did the Nasdaq Index take a dive on promising US inflation data?
• Is it too late for ASX investors to start buying US shares?
• Which ASX shares could soar if AI falls into a $500 billion hole?

Will Ebiefung 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 Goldman Sachs Group and Nvidia. The Motley Fool Australia has recommended Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

If you’re constructing a passive income portfolio, then having some ASX dividend shares that provide great dividend yields is always a good idea.

But which one could be top options for income investors now? Let’s look at three for investors to consider buying this week. They are as follows:

Dexus Industria REIT (ASX: DXI)

The first ASX dividend share that could be a buy is Dexus Industria.

It is a real estate investment trust with a focus on industrial warehouses. At the last count, it had a total of 91 properties located across major Australian cities with a combined value of $1.4 billion.

Analysts at Morgans are feeling bullish about the company. The broker notes that “DXI’s industrial portfolio remains robust with the outlook positive for rental growth. The development pipeline also provides near and medium-term upside potential and post asset sales there is balance sheet capacity to execute.”

Its analysts believe this will support dividends per share of 16.4 cents in FY 2024 and then 16.6 cents in FY 2025. Based on the current Dexus Industria share price of $2.95, this will mean dividend yields of 5.5% and 5.6%, respectively.

Morgans currently has an add rating and $3.18 price target on its shares.

GDI Property Group Ltd (ASX: GDI)

Another ASX dividend share that could be a top option for income investors is GDI Property.

It is a fully integrated, internally managed property and funds management group with capabilities in ownership, management, refurbishment, leasing, and syndication of properties.

Bell Potter thinks it could be a great option right now and believes it is well-positioned to pay some big dividends in the coming years.

The broker is forecasting dividends per share of 5 cents across FY 2024, FY 2025, and FY 2026. Based on the current GDI Property share price of 59 cents, this implies dividend yields of 8.5% for the next three years.

Bell Potter currently has a buy rating and 75 cents price target on its shares.

Woodside Energy Group Ltd (ASX: WDS)

A third ASX dividend share that analysts are tipping as a buy is Woodside Energy. It is one of the world’s largest energy producers.

Morgans is also tipping its shares as a buy. The broker highlights that its analysts “see now as a good time to add to positions” after recent share price weakness.

As for dividends, the broker is forecasting fully franked dividends of $1.25 per share in FY 2024 and then $1.57 per share in FY 2025. Based on its current share price of $29.40, this represents attractive dividend yields of 4.25% and 5.35%, respectively.

Morgans has an add rating and $36.00 price target on its shares.

The post Buy these ASX dividend shares for passive income appeared first on The Motley Fool Australia.

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• 5 things to watch on the ASX 200 on Thursday
• I’d buy Woodside shares today to generate $1,000 of monthly passive income
• 5 things to watch on the ASX 200 on Wednesday
• Would Warren Buffett buy Woodside shares?
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Motley Fool contributor James Mickleboro has positions in Woodside Energy Group. 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

If you have a penchant for ASX growth stocks, like I do, then you may want to check out the one in this article.

That’s because analysts at Goldman Sachs believe it is well-positioned for strong growth and see potential for market-beating returns from its shares.

Which ASX growth stock?

The company in question is Light & Wonder Inc (ASX: LNW).

Formerly known as Scientific Games, Light & Wonder is an American cross-platform global games company that provides gambling products and services.

It listed on the Australian share market just over a year ago. Since then, the ASX growth stock has raced over 70% higher.

However, despite this strong return, analysts at Goldman Sachs believes there’s still plenty of room for its shares to rise further from current levels.

According to a note out of the investment bank this morning, the broker has reaffirmed its buy rating and $190.00 price target on the ASX growth stock.

Based on its current share price of $156.40, this implies potential upside of 21.5% for investors over the next 12 months.

Why is the broker bullish?

Goldman has revealed why it believes that Light & Wonder shares would be a great option for investors.

Its bullish view its based largely on its belief that the company can reach its FY 2025 AEBITDA target of US$1.4 billion, which is ahead of consensus estimates. It named three reasons why:

We believe this will be driven by: 1. Share gains in North America gaming operations (GSe c.16% now to >20% over the mid-term) with strong ANZ performance a lead indicator. LNW is also increasing their R&D spend which will drive the development of top-performing games. 2. SciPlay is out indexing the social casino segment through higher monetisation rates and modest user growth, despite broader industry headwinds. 3. Strong track record in iGaming where LNW’s pedigree in land-based should continue to provide a key advantage in this large and growing market (GSe US$6bn, +14% CAGR).

Goldman also highlights that the company has a strong balance sheet, which it believes provides extra justification for a higher valuation for the ASX growth stock. It adds:

Additionally, LNW has a strong balance sheet now after a period of de-levering, and we think this is a key factor in justifying a valuation uplift with scope for capital management initiatives.

All in all, the broker appears to believe this could make Light & Wonder worth considering if you are looking for new additions to your growth portfolio.

The post 3 reasons this ASX growth stock is a top buy appeared first on The Motley Fool Australia.

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• Goldman Sachs names 1 ASX 200 stock to buy and 2 to hold
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Motley Fool contributor James Mickleboro 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 Goldman Sachs Group and Light & Wonder. The Motley Fool Australia has recommended Light & Wonder. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

BHP Group Ltd (ASX: BHP) shares were out of form on Wednesday. The mining giant’s shares ended the day almost 1% lower at $42.70.

Investors were hitting the sell button following the release of its fourth quarter update. This was despite the Big Australian reporting record iron ore production and delivering impressive copper production.

With the company’s shares now down 16% from their 52-week high, investors may be wondering if it is time to buy. So, let’s see what analysts are saying.

What are analysts saying about BHP’s update?

According to a note out of Goldman Sachs, its analysts were pleased with BHP’s strong finish to the financial year. This was particularly the case with its copper operations, which is good news given the positive outlook for the base metal. It commented:

A strong finish to the year across all divisions. Copper production of 505kt exceeded expectations by 8%, delivering the strongest production result in 15 years. All assets performed well with realised pricing better than GSe on provisional pricing lower TC/RCs. Spence exceeded guidance as the recent concentrator upgrades translated to a notable uplift in recoveries that should improve further, and grades bounced back at Escondida that will remain at similar levels as group copper production is expected to increase ~4% in FY25 (1.85-2.05Mt, GSe 1.94Mt).

Pilbara [iron ore] shipments of 75.9Mt came in 2% ahead but realised pricing was marginally lower than GSe; FY25 guidance of 282-294Mt is as expected (GSe/VA 288Mt/291Mt) as efforts focus on rail tie-ins and port debottlenecking ahead of volumes creep target of 305Mtpa by FY28.

In light of the above, the broker believes that BHP is going to report a full year result largely in line with the market’s expectations next month. It said:

We forecast FY24 U/L EBITDA of US$28.8bn (VA US$28.8bn – before Q) and U/L NPAT of US$13bn (VA US$13.3bn). We model 2H’24 U/L EPS of USc128/sh (US$6.5bn) and a final DPS of USc70/sh (55% payout, FY DPS of USc142/sh vs VA at USc149/sh). We expect net debt (BHP disclosed) at US$9.8bn (VA US$10.7bn).

Should you buy BHP shares?

In response to the update, Goldman Sachs has retained its buy rating and $48.40 price target on BHP’s shares.

Based on its current share price, this implies potential upside of approximately 13.5% for investors over the next 12 months.

In addition, a dividend yield of ~4.7% is expected over the period, which stretches the total potential return to approximately 18%.

Goldman believes its premium valuation is justified. It commented:

BHP is currently trading at ~6.0x NTM EBITDA (25-yr average EV/EBITDA of 6.6x), a slight premium to RIO on ~5.5x; and at 0.9xNAV vs RIO at 0.8xNAV. Over the last 10 years, BHP has traded at a ~0.5x premium to global mining peers. We believe this premium can be partly maintained due to ongoing superior margins and operating performance (particularly in Pilbara iron ore where BHP maintains superior FCF/t vs. peers).

The post Could BHP shares provide an 18% return for investors? appeared first on The Motley Fool Australia.

More reading

• 5 things to watch on the ASX 200 on Thursday
• BHP share price on watch after record-breaking FY24 iron ore production
• 5 things to watch on the ASX 200 on Wednesday
• No savings? I’d use the Warren Buffett method to earn lifelong passive income with ASX shares
• Why are BHP and other ASX 200 mining shares getting hammered on Tuesday?

Motley Fool contributor James Mickleboro 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 Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The downtrend in BrainChip Holdings Ltd (ASX: BRN) shares shows no signs of exhaustion with the ASX artificial intelligence (AI) stock hitting three-month lows on Tuesday.

Winding back to 27 June, a little less than three weeks ago, shares in Brainchip were fetching 22.5 cents. Since then, investors have continued to sell shares at lower and lower prices.

They finished the session on Wednesday at 19.8 cents, down 15% from this mark.

With the continued selling pressure, one can’t help but wonder, what’s next for Brainchip shares?

Brainchip’s struggles in FY24

Brainchip shares underperformed by a wide margin in FY24, plunging by nearly 39%. The stock peaked at 49 cents per share in February but has since fallen dramatically.

A post-mortem analysis shows that there were a couple of factors behind this volatility. Here’s the lowdown:

1. AI stock mania driving BrainChip shares

BrainChip’s significant rise in February was likely influenced by the soaring stock of US-listed AI giant Nvidia Corp (NASDAQ: NVDA).

For anyone who missed it, Nvidia’s stock price went vertical from around US$475 on 3 January to more than US$1,000 per share by May. This speculative trading drove up BrainChip shares despite the company’s unproven financial performance.

But it wasn’t long before the market snapped back to economic reality. Unlike Nvidia, which grew earnings by more than 600% in Q1, BrainChip reported a net loss of US$28.9 million for FY23, with sales declining by 95% year over year.

2. Disappointing fundamentals

BrainChip specialises in neuromorphic computing, a niche area within AI that replicates the human brain’s processing power.

The company released the second generation of this technology, Akida, in FY24. But despite this innovation, BrainChip has yet to secure significant royalty agreements for its intellectual property.

In the wake of declining revenues, this may have been a fan to the flames already charring BrainChip shares. Investors were expecting more.

As my colleague James said in a separate analysis, Brainchip “has promised the world and delivered nothing in a market dominated by a US$3 trillion behemoth”. That behemoth is Nvidia.

At the recent AGM, BrainChip CEO Sean Hehir said the company was in licensing discussions that could lead to potential sales in the audio and microcontroller segments.

However, as my colleague Rhys noted, “Investors will need to see that translated into real sales” first to get behind the company.

3. Sentiment is flat in BrainChip shares

Analysts are hesitant, too. Peak Asset Management recently recommended selling BrainChip shares following the lacklustre financials.

At the end of Q1 CY24, the company’s cash reserves decreased from US$14.3 million to US$13 million, with rising operating cash outflows and lower cash inflows from customers.

“Cash inflows from customers were lower in the March quarter compared to the prior quarter”, Peak AM said, noting it “prefer[s] other stocks at this stage of the cycle”.

Foolish takeout: What does this mean for investors?

AI has become somewhat of a mania in 2024. BrainChip alone faces stiff competition from major players like Nvidia.

This increased competition and the company’s financials have added to investor concerns about BrainChip’s ability to compete in this rapidly evolving market.

I’d say that’s why BrainChip shares have had a volatile year, and why the road ahead remains uncertain. While the company’s innovative technology holds promise, it needs to deliver on its revenue potential to regain investor confidence.

Investors might want to weigh the potential rewards against the risks.

The post Down 15% in less than 3 weeks, what’s next for Brainchip shares? appeared first on The Motley Fool Australia.

More reading

• BrainChip shares struggle in FY24 – what’s ahead for FY25?
• Is it time to give up on BrainChip shares?
• Brainchip share price tumbles 40% in the past year. What’s next?

Motley Fool contributor Zach Bristow 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 Nvidia. The Motley Fool Australia has recommended Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Insurance Australia Group Ltd (ASX: IAG) share price performance has been very pleasing in 2024 to date. It has risen almost 30%, while the S&P/ASX 200 Index (ASX: XJO) has only risen around 6%.

We shouldn’t try to predict where the IAG share price will be in two months. But, we can evaluate whether the ASX share is a good longer-term opportunity today.

Several factors have helped the insurer in recent times, including elevated premium increases (amid higher inflation), stronger investment earnings (thanks to higher bond yields and strong equity markets), and relatively stable natural peril events.

Soon enough, we will see the company’s FY24 results during the August reporting season.

Recent developments

IAG announced last month that it had signed two five-year strategic agreements with global reinsurers to improve its “future financial stability”.

The ASX insurance share said the long-term natural perils volatility protection with Berkshire Hathaway and Canada Lie Reinsurance provides “greater certainty over natural perils costs for customers.” This provides up to $680 million of additional protection annually and up to $2.8 billion over the five-year period.

This will “effectively limit” IAG’s natural peril costs to $1.28 billion in FY25, a 17% increase on the FY24 figure.

It also said it had purchased adverse development cover (ADC), which provides $650 million of protection for IAG’s long-tail reserves of approximately $2.5 billion.

The company revealed it expects the FY24 reported insurance profit to be at the upper end of its $1.2 billion to $1.45 billion guidance range, compared to $803 million in FY23. The reported insurance margin is expected to be at the upper end of the 13.5% to 15.5% guidance range, taking into account the ADC cost.

FY24 gross written premium growth is expected to be consistent with its “low double-digit” guidance.

So, things are going well for the company, and it has made moves to reduce long-term volatility.

Is the IAG share price an opportunity?

The broker UBS suggested the reinsurance deals are “likely to improve investor perceptions of earnings quality.”

UBS thinks the insurance margin will “push up through 16%” during FY25 after double-digit repricing during FY24. The broker then said:

We continue to believe consensus is under estimating peak-cycle margins, albeit the reinsurance deals announced today likely present a near-term drag. We are modelling a margin overshoot over the next 12-18 months, relative to mid-cycle guidance.

…A profit commission is payable in the event of favourable perils, effectively skewing IAG’s exposure to the upside whilst protecting downside.

UBS then noted that the 10-year average for IAG shares’ price/earnings (P/E) ratio is 15.5x, compared to the current IAG share valuation of 16.5x UBS’ estimated earnings for FY25.

UBS concluded with comments on the valuation:

This looks somewhat demanding and we see better value in other GI [general insurance] names at present.

The broker has a $7.10 price target on IAG shares, which implies that shareholders will not see any capital growth in 12 months, considering the current share price is $7.11.

The post Are IAG shares a buy before reporting season? appeared first on The Motley Fool Australia.

More reading

• Up 26% this year, what’s the view on IAG Shares?
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• Here’s a recap on IAG shares in FY24 – and their FY25 outlook
• Here are the top 10 ASX 200 shares today
• 9 ASX 200 shares finishing FY24 on a 52-week high

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 Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

On Wednesday, the S&P/ASX 200 Index (ASX: XJO) was back on form and charging higher. The benchmark index rose 0.7% to 8,057.9 points.

Will the market be able to build on this on Thursday? Here are five things to watch:

ASX 200 expected to fall

The Australian share market looks set to fall on Thursday following a poor night on Wall Street. According to the latest SPI futures, the ASX 200 is expected to open the day 41 points or 0.5% lower this morning. In the United States, the Dow Jones was up 0.6%, but the S&P 500 fell 1.4% and the Nasdaq dropped 2.8%.

Oil prices charge higher

ASX 200 energy shares such as Beach Energy Ltd (ASX: BPT) and Woodside Energy Group Ltd (ASX: WDS) could have a good session after oil prices charged higher overnight. According to Bloomberg, the WTI crude oil price is up 2.6% to US$82.89 a barrel and the Brent crude oil price is up 1.6% to US$85.09 a barrel. A large drop in US inventories boosted prices.

Buy BHP shares

Goldman Sachs thinks BHP Group Ltd (ASX: BHP) shares are good value at current levels. In response to the mining giant’s fourth quarter update, the broker has retained its buy rating and $48.40 price target on its shares. This implies potential upside of over 13% for investors from current levels. It said: “After reflecting the June Q and financial disclosures ahead of the result, there is little change to our EBITDA forecasts; FY26 EPS increases 2% on minor changes to D&A and net interest.”

Gold price eases

It could be a subdued session for ASX 200 gold shares Newmont Corporation (ASX: NEM) and Northern Star Resources Ltd (ASX: NST) after the gold price eased lower overnight. According to CNBC, the spot gold price is down 0.15% to US$2,464.3 an ounce. This appears to have been driven by profit taking after the gold price reached a record high a day earlier.

Fortescue job cuts

Fortescue Ltd (ASX: FMG) shares will be on watch today after the miner announced major job cuts. While the company “remains resolute in its commitment to be the world’s leading green technology, energy and metals company”, it revealed that “initiatives are being implemented to simplify its structure, remove duplication and deliver cost efficiencies.” In light of this and in order to deliver on its strategy and generate the maximum value for shareholders, approximately 700 people from across Fortescue’s global operations will be offered redundancies.

The post 5 things to watch on the ASX 200 on Thursday appeared first on The Motley Fool Australia.

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• Why Cettire, Core Lithium, Northern Star, and Step One shares are charging higher
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Motley Fool contributor James Mickleboro has positions in Woodside Energy Group. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Are you an income investor on the hunt for new ASX dividends stocks to buy?

If you are, then you may want to check out the two listed below that analysts are tipping as buys. Here’s what they are saying about them:

Cedar Woods Properties Limited (ASX: CWP)

A recent note out of Morgans reveals that its analysts are feeling positive about this property company and see it as an ASX dividend stock to buy.

In fact, the broker has put Cedar Woods’ shares on its best ideas list with an add rating and $5.60 price target.

Morgans thinks that the company’s shares are undervalued and deserve to trade on higher multiples. The broker explains:

CWP is a volume business and the demand for lots looks to be improving, with margins to invariably follow. CWP’s exposure to lower priced stock in higher growth markets sees further potential to drive earnings. On this basis, we see every reason for CWP to trade at NTA and potentially at a premium, were the housing cycle to gain steam through FY25/26.

In respect to dividends, Morgans is forecasting dividends per share of 18 cents in FY 2024 and then 20 cents in FY 2025. Based on the current Cedar Woods Properties share price of $4.80, this will mean dividend yields of 3.75% and 4.2%, respectively.

Suncorp Group Ltd (ASX: SUN)

Analysts at Goldman Sachs are tipping insurance giant Suncorp as an ASX dividend stock to buy right now.

The broker currently has a buy rating and $18.00 price target on the insurance giant’s shares.

Goldman is feeling positive about the company due to tailwinds in the general insurance market and potential capital returns. It said:

We are favourably disposed to Suncorp, noting in large part the tailwinds that exist in the general insurance market – i.e., very strong renewal premium rate increases and the benefit of higher investment yields. We think the strong rate momentum that SUN is getting should offset any volume pressures. SUN’s underlying margins are also expected to stay within 10-12% despite higher reinsurance costs, increased perils allowances and lower reserve release assumptions as SUN benefits from significant price increases. Further, we note that we could start to see more meaningful benefits to margin from underlying claims inflation abating. Separate to our thesis, we also see possible catalysts on the horizon for SUN including capital return post the bank sale, if completed.

As for income, Goldman expects this to support the payment of fully franked dividends per share of 79 cents in FY 2024 and then 85 cents in FY 2025. Based on the Suncorp share price of $17.03, this will mean yields of 4.6% and 5%, respectively.

The post Analysts say these ASX dividend stocks are top buys appeared first on The Motley Fool Australia.

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Motley Fool contributor James Mickleboro 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 Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The share market is a great place to find great dividend stocks that offer an ASX dividend yield of at least 7%.

It’s pleasing to receive annual passive income without having to do any work.

An investor with $20,000 to invest in ASX dividend shares can unlock a pleasing level of cash flow. But, we shouldn’t expect to generate enough income to retire with $20,000 instantly.

Income-seeking investors want a generous ASX dividend yield from their investments – a 2% dividend yield isn’t going to cut it. However, trying to find stocks that yield above, say, 10%, can be dangerous because that may not be sustainable.

Finding the right balance

It’s important to understand why businesses have a high dividend yield before we buy them.

Does a stock have a high yield because the share price has been crunched, profit is falling, and the next dividends are going to be smaller?

Is the yield currently high, but the company is in a very cyclical industry, and therefore, the dividend is unreliable?

Or perhaps the stock is wrongly undervalued by the market and it can maintain that level of dividend payments for the foreseeable future?

One major factor to consider is the dividend payout ratio – how much of the company’s annual profit is paid as dividends. The higher the payout ratio, the higher the ASX dividend yield, but also the less that’s being retained in the company to reinvest for future growth.

Some businesses are capable of growing earnings and sustaining a very high dividend payout ratio, while others may need to keep some profit just to keep next year’s earnings at a similar level.

ASX dividend shares I’d choose for yield

I’d go for businesses that are expected to have a high ASX dividend yield for the foreseeable future and can deliver earnings growth.

Telstra Group Ltd (ASX: TLS) shares could provide a large dividend yield, supported by growing earnings amid rising mobile prices and subscriber growth. According to Commsec, the telco is expected to pay a grossed-up dividend yield of 7.1% in FY25, with further growth in FY26.

Metcash Ltd (ASX: MTS) supplies various independent food and liquor retailers, including IGA, IGA Liquor, Bottle-O, Cellarbrations and Porters Liquor. It also owns hardware businesses, including Mitre 10, Home Timber & Hardware and Total Tools. Population growth and a recovery of hardware earnings are potential future tailwinds. Commsec estimates imply a grossed-up dividend yield of 8% in FY25 and growth in FY26.

Medibank Private Ltd (ASX: MPL) is the largest private health insurer. It’s benefiting from rising premiums, strong investment returns on its assets and growing subscriber numbers. Commsec numbers suggest a grossed-up dividend yield of 6.6% in FY25, with further growth in FY26.

Universal Store Holdings Ltd (ASX: UNI) is a retailer of premium youth fashion. It has grown its dividend each year since 2021, when it started paying one. The business can benefit from an ongoing store rollout and an eventual recovery of household retail spending. Commsec numbers suggest a forecast grossed-up dividend yield of 7.7% in FY25 and an even bigger dividend in FY26.

I think that’s a good starting point for an ASX dividend portfolio. The forecast average grossed-up dividend yield for FY25 of the stocks I’ve mentioned is about 7.3%, so a $20,000 investment spread evenly between them would generate $1,460.

The post Here’s one way to invest $20k to target an average 7% ASX dividend yield appeared first on The Motley Fool Australia.

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• If I were 60 I’d buy these ASX shares for dividends

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 positions in and has recommended Telstra Group. 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.

Looking for a $1,000 monthly passive income to boost your retirement prospects?

Or maybe to spend on a few luxury extras well before you enter those retirement years, like a fancy vacation, that new living room ensemble, or perhaps even an upgraded car?

While there are a number of quality S&P/ASX 200 Index (ASX: XJO) dividend stocks that can help build that passive income stream, the one I’d buy today is oil and gas company Woodside Energy Group Ltd (ASX: WDS).

Woodside shares have been in an uptrend since 24 June, with the stock up 9% in that time. Still, at yesterday’s closing price of $29.40 a share, the ASX 200 dividend stock is down 18% over 12 months. Which, I believe, represents a potentially opportune long-term entry point.

Now the future, by definition, is uncertain.

But I believe that amid strong global energy demand, both oil and gas prices are more likely to rise over the next 12 months than they are to fall. And even at current Brent crude prices of close to US$86 per barrel, Woodside is well in profit range and likely to continue rewarding shareholders with outsized passive income.

We’ll get to that below.

But first, an important reminder.

Spread your risks

In this article, we look at only one ASX 200 dividend stock to garner our $1,000 in monthly passive income, or $12,000 a year.

Of course, if I only buy Woodside shares, then my entire income stream is reliant on this one company’s performance. That might work out swimmingly. But if the company runs into unexpected headwinds it could also see my income take a big, unexpected hit.

With that in mind, I’d eventually expand my passive income portfolio to a larger number of ASX dividend shares. There’s no magic number. But 10 is a decent target. Ideally, these will operate across a range of different sectors and locations, helping to lower my overall risks.

Also, bear in mind that the yields you generally see quoted are trailing yields. Future yields may be higher or lower depending on a range of company-specific and macroeconomic factors.

Drilling into Woodside shares for $1,000 a month in passive income

Now, let’s return to the one ASX dividend stock I’d buy today.

Over the past 12 months, Woodside paid a fully franked interim dividend of $1.244 a share on 28 September and a fully franked final dividend of 91.7 cents a share on 4 April.

That equates to a full-year passive income payout of $2.161 a share, with potential tax benefits from those franking credits.

At yesterday’s closing price of $29.40, this ASX 200 dividend stock has a market-beating trailing yield of 7.4%.

Now, to secure my $1,000 in monthly passive income, or $12,000 a year, I’d need to buy 5,553 shares today.

Granted, that’s a large quantity of stock to buy all in one go.

But as I’ve said before, investing is a long game.

If I can’t buy all those Woodside shares today, I can buy them in smaller allotments over time.

Eventually, I’ll achieve my passive income goal.

The post I’d buy Woodside shares today to generate $1,000 of monthly passive income appeared first on The Motley Fool Australia.

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• 5 things to watch on the ASX 200 on Wednesday
• Would Warren Buffett buy Woodside shares?
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• 5 things to watch on the ASX 200 on Monday
• Top 4 reasons why more Aussies are managing their own superannuation

Motley Fool contributor Bernd Struben 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 no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.