Want $500 in monthly passive income? Buy 27,000 shares of this ASX stock in 2023

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I think ASX stocks are a great way for investors to unlock passive income. Cash limited (ASX:MTS) stocks could be one of the best options for dividends.

Metcash may not be a name many investors are familiar with. However, it is the company that supplies IGA supermarkets. It is also the liquor supplier to Cellarbrations, The Bottle-O, IGA Liquor, Thirsty Camel, Big Bargain Bottleshop, Duncans and Porters Liquor.

But it also has a hardware division that is the second largest player in the Australian hardware market. It carries the Miter 10, Home Timber & Hardware, and Total Tools brand. There are more than 700 stores in metro and regional areas across the country.

Metcash passive dividend income expectations

A $500 monthly passive income equates to $6,000 in annual passive dividend income.

According to data on Commsec, the company is expected to pay an annual dividend per share of 22 cents. If an investor had just over 27,000 shares of Metcash, he would get the $6,000 in cash dividends, plus all postage credits. Postage credits can be an incentive for after-tax returns.

At Metcash’s current share price, the forecast of 22 cents per share equates to a grossed dividend yield of approximately 7.5%.

The dividend yield is quite high as the company aims for a dividend payout ratio of approximately 70% of underlying earnings. This keeps about 30% of annual underlying profit within the company so it can deliver more growth next year.

Why is the ASX stock attractive?

I think there has to be more to an ASX dividend stock than the dividend yield to make it investable. I think it should provide good signs of longer term earnings growth.

With Metcash, the company says its operating leverage helps with price competitiveness and high costs.

The ASX share is aimed at improving the network competitiveness of the food stores, with upgrades and renewals. The supply chain is being improved with distribution capacity and capacity expansion – a new distribution center in Victoria is expected in 2024.

In spirits, there are investments in stores and cold room upgrades. It introduces more proprietary and exclusive brands to the portfolio to support supplier partnerships. Metcash is also working to improve the beverage division’s supply chain.

The hardware division now makes the most profit before interest and tax (EBIT). The company is working to expand its store network, improve its offerings for builders and expand its presence in the DIY section of the market.

The second half of FY23 started well. In the first four weeks, Metcash reported food sales growth of 4%, hardware sales growth of 8% and beverage sales growth of 8.9%. This could increase passive dividend income in FY23.

Silly takeaway

I think the Metcash business offers a good mix of defensive food and liquor revenue as well as growth through the hardware division.

The shares look good to me, trading at just 13 times FY23 estimated earnings according to Commsec.

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