ASX dividend shares could be a very interesting part of the market to watch next year. Is the outlook for passive income stocks promising or weakening?
There are different groups of the ASX share market, so I'll talk about them in sectors.
FY21 and FY22 were very strong years for most industries, but things are looking a bit more mixed for FY24.
Of course, one year of dividend payments shouldn't influence a buy or sell decision.
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ASX bank shares
There are a number of ASX bank shares for investors to choose from like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), ANZ Group Holdings Ltd (ASX: ANZ), Macquarie Group Ltd (ASX: MQG) and so on.
Banks are now facing a difficult environment – with higher interest rates, arrears may rise and demand for lending may be lower. Competition in the sector may mean the net interest margin (NIM) may drop down from where it is.
According to projections on Commsec, the dividends from CBA, Westpac and NAB may be flat or slightly increase. But, the dividends from ANZ and Macquarie may fall.
ASX iron ore shares
One area of ASX dividend shares that is seeing strengthening conditions is ASX iron ore shares. The iron ore price has been strengthening and this is boosting the profitability and dividend potential of those businesses.
The biggest three in the sector are BHP Group Ltd (ASX: BHP), Rio Tinto Ltd (ASX: RIO) and Fortescue Metals Group Ltd (ASX: FMG).
The dividends from all three are expected to be large, according to Commsec. Rio Tinto and Fortescue are both predicted to pay dividends that are a bit bigger than last year.
ASX retail shares
The ASX retail share sector could see widespread payout cuts, even if they're not particularly deep cuts.
Names like JB Hi-Fi Limited (ASX: JBH), Super Retail Group Ltd (ASX: SUL), Nick Scali Limited (ASX: NCK) and Harvey Norman Holdings Limited (ASX: HVN) could all pay lower dividends in FY24, according to Commsec. However, the valuations are relatively cheap, so the dividend yields from these ASX dividend shares could still be attractively high.
However, a weak dividend in FY24 doesn't mean the retail environment will be weak forever, FY25 or FY26 may see promising signs of a recovery.
REITs
It's understandable why share prices of real estate investment trusts (REITs) have fallen in the last year and a half – higher interest rates should translate into lower (commercial) property values.
However, higher interest rates may also lead to higher finance costs, hurting rental net profit.
A number of REIT and property businesses are expected to see lower distributions in FY24 such as Charter Hall Long WALE REIT (ASX: CLW), Dexus (ASX: DXS) and Vicinity Centres (ASX: VCX), according to Commsec.
Foolish takeaway
Some sectors could feel the negative influence of higher interest rates in FY24, while miners may be able to continue their strong performance.
