5% dividend yield! Here's one of my favourite cheap ASX 200 shares for passive income

I think this stock is a tasty buy.

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The S&P/ASX 200 Index (ASX: XJO) share Collins Foods Ltd (ASX: CKF) is one of my favourite picks for passive income. Not only that, but it also looks cheap to me currently.

I want to see a few things when it comes to an ASX dividend share. It needs to have a solid starting dividend yield, provide a relatively stable dividend, and have compelling long-term (dividend) growth potential. Ideally, that business is trading at a good valuation as well.

I believe Collins Foods, the operator of hundreds of KFCs across Australia and Europe, ticks all of the boxes I'm looking for in an ASX 200 share.

Passive income yield

Collins Foods pays its dividend from the profit that it makes each year, which is generated from its large network of KFC outlets and smaller network of Taco Bells in Australia.

In FY24, the fast-food company paid an annual dividend per share of 28 cents. At the current Collins Foods share price, that translates into a fully franked dividend yield of 3.1% and a grossed-up dividend yield of 4.5%.

However, the 2024 financial year payouts are history – let's focus on the next 12 months.

According to the estimates on Commsec, the company is projected to pay an annual dividend per share of 31.2 cents. That payout would translate into a fully franked dividend yield of 3.5% and a grossed-up dividend yield of 5%.

Stability

If I'm investing for passive income, I'd want to have a relatively high level of confidence that the dividends can keep flowing even if there's a downturn.

I think fast food is a relatively defensive sector, so Collins Foods' profit could be fairly resilient over the next 12 months (and beyond).

Collins Foods has an impressive dividend history, in my opinion. It has grown its annual payout every year since 2014. It has already delivered a decade of stable and growing dividends, though dividend growth is certainly not guaranteed.

Earnings growth for the ASX 200 share

I believe profit growth is a key part of an ASX 200 share funding its passive income and also delivering capital growth for shareholders. FY24 saw underlying net profit after tax (NPAT) growth of 15.6% to $60 million.

The business is steadily growing its store network in Australia and Europe, which is increasing its revenue potential. Increased scale can also help operating leverage. In FY24, revenue increased 10.4%, and underlying profit grew 15.6%. The company is expecting to add more outlets in FY25.

According to the Commsec forecast, the company is expected to increase its earnings per share (EPS) to 54.4 cents and then to 65.9 cents in FY26.

Valuation

Using those above forecast profit figures, the Collins Foods share price is valued at 16x FY25's estimated earnings and under 14x FY26's estimated earnings. In my opinion, that's a cheap price-earnings (P/E) ratio for a growing, defensive business.

Motley Fool contributor Tristan Harrison has positions in Collins Foods. 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 recommended Collins Foods. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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