APA general discussion., page-87

https://www.********.au/2024/08/02/1-magnificent-asx-dividend-stock-down-33-to-buy-and-hold-forever/

Some ASX dividend stocks can provide a great level of passive income. A few businesses have been sold off during this uncertain period and this can create opportunities.

When a business is sold off, it can lead to a higher dividend yield. For example, if a business had a 6% distribution yield and the share price declined 10%, it would result in an ending yield of 6.6%.

I believe that APA Group (ASX: APA) is a solid ASX dividend stock and has a good growth runway ahead.

The business has a diversified portfolio of energy investments. It describes its operations as owning and/or managing and operating a $27 billion portfolio of gas, electricity, solar and wind assets. It delivers approximately half of Australia's gas usage.

The business also has electricity transmission assets, connecting Victoria with South Australia, Tasmania with Victoria and NSW with Queensland.

Firstly, let's look at the passive income potential.

Passive income from the ASX dividend stock

Impressively, APA has managed to grow its annual distribution every year since 2004, which is one of the longest growth streaks on the ASX.

The business pays its distribution each year from the cash flow from its assets and operations.

In FY24, APA is expecting to pay a distribution of 56 cents per security, which translates into a distribution yield of 7%. As shown on the chart below, the APA share price has declined 33% since mid-2022.

The forecasts on Commsec suggest that APA could pay an annual distribution per security of 57 cents in FY25 and 58 cents in FY26. That translates into a forward distribution yield of 7.1% and 7.25%, respectively.

Long-term growth

I believe that energy generation and transmission will be an important factor in the Australian economy for decades to come, if not forever.

I like the moves the business has been making to expand with electricity-related assets.

The ASX dividend stock wants to use renewables, firming, and electricity transmission to help decarbonise mining in the Pilbara region. The business also wants to connect renewable energy zones to consumers in NSW and Victoria.

APA continues to invest in gas pipelines, creating new connections for new areas that can unlock further cash flow for the business.

The business said it has a strong pipeline between FY24 and FY26, with capital expenditure of more than $1.8 billion.

APA also has over 90% of its revenue linked to inflation, so the ongoing elevated inflation is helpful for its top line.

Foolish takeaway

The business has a high yield now and more potential income growth in the future (particularly in electricity transmission and renewable energy). Its debt is a headwind for the ASX dividend stock, and gas may not be an important part of the energy mix forever. However, the Australian government expects gas to play a role for decades to come.

I think this business could play a useful part in an income-focused portfolio.