Some investors may only consider ASX blue chip shares for dividend income. But I'm here to tell you that small-cap shares can also be great ASX dividend shares and a fine source of passive income.
A dividend yield is calculated by the multiple of earnings a company trades at – the price/earnings (P/E) ratio – and how much profit it pays out each year, referred to as the dividend payout ratio. We can look at these metrics whether a company's market capitalisation is $100 million or $100 billion.
With that in mind, I'm going to talk about two businesses whose market capitalisations are both under $1 billion.
Step One Clothing Ltd (ASX: STP)
Step One describes itself as a direct-to-consumer online retailer for 'innerwear'. The company touts itself as offering an "exclusive range of high-quality, organically-grown and certified, sustainable, and ethically-manufactured innerwear that suits a broad range of body types". It has a presence in Australia, the US, and the UK.
FY24 may be an uncertain time for retailers, but the company has done well by focusing on profitability rather than revenue growth. This strategy saw underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grow by 33.1% to $12 million while underlying net profit after tax (NPAT) went up 61.7% to $8.6 million.
As soon as market conditions permit, the company will actively pursue growth again. In FY24, Step One says it will continue to pursue "profitable growth", expand the customer base, diversify its product range, and invest in its capabilities. It also says it will expand its sales channels and improve customer experience, as well as continue to explore the potential of new markets.
In FY23, the ASX dividend share paid an annual dividend per share of 5 cents. The estimate on Commsec suggests the dividend per share could rise to 5.9 cents in FY25. This would be a grossed-up dividend yield of 11.6%, which would be a large and rewarding payout. Remember though, a forecast is not a guarantee.
Universal Store Holdings Ltd (ASX: UNI)
This ASX retail share owns a group of what it calls "premium youth fashion brands". Its main businesses are Universal Store, THRILLS, and Worship. It's also trialling the Perfect Stranger brand as a standalone business.
At last count, the company had 95 physical stores across Australia. In FY24, it's expecting to open two new Perfect Stranger stores in the first quarter (to reach ten) and planning to accelerate the new store roll-out of this brand, opening between five to eight stores for the financial year. It's also expecting to open between four to six new Universal Store locations in FY24 and one or two THRILLS stores.
A growing store count can help the company grow earnings when retail conditions bounce back, hopefully by FY25.
On Commsec, the ASX dividend share is projected to pay an annual dividend per share of 25.9 cents. This would translate into a grossed-up dividend yield of 11%. This would also be a large, attractive yield if that's what the business achieves.
