Could buying Wesfarmers shares give you $10,000 in annual dividend income by retirement?

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Wesfarmers Ltd (ASX: WES) shares are a leading contender for dividend income, in my opinion. It has a long record of paying dividends to shareholders, and long-term investors are getting quite a lot more in dividends than they were a decade ago.

In FY22, the business paid an annual dividend per share of $1.80. In FY09, it paid a full-year annual dividend per share of $1.10. But, that growth misses the returns of capital over that time, such as $2 per share during FY22. It has also paid special dividends.

Wesfarmers also distributed one Coles Group Ltd (ASX: COL) share for each Wesfarmers share that a Wesfarmers shareholder owned when the company de-merged the supermarket business.

Including the 63 cents annual dividend per share paid by Coles in FY22, that amounts to a total dividend of $2.43 (63 cents from Coles plus $1.80 from Wesfarmers) of dividends for long-term Wesfarmers shareholders in FY22 – a compound annual growth rate (CAGR ) of 6.3% between FY09 and FY22.

Growth can continue

Not only is the distant future unknowable, it’s particularly difficult to estimate what a company’s future will look like.

But, I think the way that Wesfarmers is set up is promising for long-term success.

It has a diversified portfolio across a number of sectors. I think Bunnings and Kmart are two of the best retailers in Australia and I think they can lead their respective segments for a long time to come.

Wesfarmers is also in other areas such as chemicals, energy and fertilizers (WesCEF), which is seeing good earnings growth. Within this division, the company is involved with a developing lithium project called Mt Holland. The current lithium price is promising for long-term earnings for Mt Holland.

The company has also invested in a new healthcare division after its purchase of the Priceline and Clear Skincare Clinics businesses.

Wesfarmers sees healthcare as an “important, large sector with long-term growth tailwinds”, with “increasing demand for health, beauty and wellbeing products and services”.

The company says that with “strong fundamentals” and “the ability to leverage group capabilities”, management expects the healthcare division can “deliver superior returns over the long-term”.

I believe this segment could be an important driver of long-term value.

It’s useful that Wesfarmers can change its portfolio as it wants, so that it’s always future-focused.

The potential for Wesfarmers to pay big dividends in the future

Commsec numbers suggest Wesfarmers could pay a grossed-up dividend yield of 5.7% in FY24. Someone would need to have just over $175,000 of Wesfarmers shares to generate $10,000 using that 5.7% yield.

Depending on the size of a retirement portfolio, that may be too much invested in a single company. Having a portfolio of at least ten positions (for diversification purposes), but each position being capped at 10% of the portfolio, means the portfolio would need to be at least $1.75 million in size.

Of course, it’d be quite possible to invest a smaller amount into Wesfarmers shares and benefit from compound growth over time. Without a working crystal ball, it’s hard to say how well Wesfarmers shares will perform for the next 20, 30 or 40 years.

I certainly think it would be possible for a $20,000 investment to grow into $175,000 (and then pay attractive dividends), but an investor would likely need to give Wesfarmers at least a couple of decades to achieve attractive long-term growth.

But, if I were to put my hopes on an ASX share to deliver that growth over two or so decades, I think Wesfarmers could be one of the most likely S&P/ASX 200 Index (ASX: XJO) shares to do it due to its long-term focus.

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