If you’re on the lookout for passive income from ASX shares in FY 2024, there are a few pitfalls you should watch out for.
Now I don’t say that to scare you off.
Quite the contrary.
Unlike many global exchanges, including those in the United States, many ASX shares pay dividends with franking credits.
With fully franked dividends, you get credit for the 30% in corporate taxes the company has already paid. Meaning you can likely hold onto more of that passive income come tax time.
There are a lot of quality ASX shares making regular dividend payments. But the highest-yielding stocks in FY 2023 won’t necessarily be the best ones to own for passive income in FY 2024.
Here’s why.
You’re looking at last year’s passive income from these ASX shares
When you’re running your slide rule over ASX dividend shares, it’s important to bear in mind that the yields you’re looking at are trailing yields.
Based on the dividends paid over the past 12 months, trailing yields are backwards looking by definition. While it’s possible a high-yielding ASX share may deliver another bundle of passive income in the year ahead, there are no guarantees.
Before diving in, it’s a good idea to check out the forecast yields from a few different analysts. These are essentially the analysts’ best, educated guesses. But it should give you a better idea of what to expect in the way of dividends over the coming 12 months.
There are a number of reasons a high-yielding stock in FY 2023 may not be able to pay out the same high levels of passive income in FY 2024.
Keep an eye on these signs
First, if management opted to give too much of the company’s profits back to shareholders, they may not be investing enough back into growth avenues like marketing, and research and development. That could put the stock in trouble over time and reduce future dividend payouts.
Second, check to see if the company you’re looking at has experienced a big share price fall in recent months. Any large retrace in the share price will inflate the trailing yield, while not boding particularly well for next year’s dividends.
Third, most ASX shares are subject to some form or other of cyclical swings.
Retail, energy and resource stocks spring to mind. But financial and tech stocks certainly aren’t immune either.
As you’re likely aware, many of the top dividend-paying shares in FY 2023 were resource and energy shares.
Yancoal Australia Ltd (ASX: YAL), for example, was a big beneficiary of near-record high thermal coal prices in the first half of FY 2023.
This saw the ASX coal share leap onto the radars of passive income investors as the miner shared its all-time high profits with stockholders.
Over the financial year just past, Yancoal paid out a total of $1.227 per share in dividends, partly franked.
With the Yancoal share price closed on Friday at $4.78 – down 30% since early September when thermal coal prices peaked – the trailing yield now equates to a whopping 25.7%, partly franked.
While I believe this ASX share is likely to continue delivering some solid passive income in FY 2024, I think it’s unlikely that investors buying today will earn this level of yield.
Happy dividend hunting!
