I'm going to discuss an appealing ASX dividend stock that could provide excellent long-term passive income. That ASX stock is MFF Capital Investments Ltd (ASX: MFF), one of the larger investment businesses on the ASX.

MFF recently announced the intended acquisition of Montaka, a funds management business. This acquisition will make MFF an operational business rather than just a listed investment company (LIC).

The ASX stock's efforts as a LIC have been fruitful. According to CMC Markets, over the past decade, owners of MFF shares have seen total shareholder returns (TSR) of an average of 13.3% per year.

How did it achieve that? According to MFF, it's invested in the "strongest, best companies for the future". The positions with a weighting of more than 5% of the portfolio include Alphabet, Amazon, Mastercard, Visa, American Express, Meta Platforms, Bank of America, Home Depot, and Microsoft.  

Let's look at why it's an appealing option for dividends.

Passive income potential

MFF Capital has steadily grown its annual ordinary dividend per share each year since 2018, which I think is impressive considering that includes the COVID-19 period.

There are plenty of ASX dividend stocks that have not paid consistently growing ordinary dividends over the past five years, such as Commonwealth Bank of Australia (ASX: CBA), BHP Group Ltd (ASX: BHP), Westpac Banking Corp (ASX: WBC) or Woodside Energy Group Ltd (ASX: WDS).

Dividends are not guaranteed; they are paid for by the profit the business generates. MFF has built up significant profit reserves from prior investment returns it has made.

At the annual general meeting (AGM), MFF's leadership noted the business has retained profits and a profit reserve of $1.36 billion. The MFF Chair, Annabelle Chaplain, said:

In recent years, MFF has regularly increased its fully franked dividends. In addition to the increased final dividend, directors have confirmed that they intend to increase the rate of the six-monthly dividend to 8 cents per ordinary share with the next interim results (expected to be announced towards the end of January 2025).

At the current MFF share price, an annualised payout of 16 cents per share translates into a fully franked dividend yield of approximately 4% and a grossed-up (including franking credits) dividend yield of close to 6%.

$4,000 of annual dividends

If an investor ignored the franking credits and just thought about the cash payment, they'd need to own 25,000 MFF shares to generate $4,000 of annual passive income.

However, if we include the franking credits in the annual passive income goal of $4,000, then an investor would only need to own 17,500 MFF shares.

Of course, the above calculations are based on the dividends expected to be paid in 2025. If the growth streak continues, the dividends could be even bigger in 2026 – investors could receive $4,200 or $4,400 of annual passive income, depending on what MFF pays.

Considering the MFF share price is trading at a nice discount to the underlying pre-tax value of $4.50 at 25 October 2024, I'd say it's undervalued.