Woolworths Limited (ASX: WOW) shares are tipped to pay fully franked dividends equivalent to 3%.
Woolies' dividend is below the market's, or S&P/ASX 200's (Index: ^AXJO) (ASX: XJO), average of 4% and compares to rival Wesfarmers Ltd's (ASX: WES) 5%.
Still, there may be some merit in asking if now is the time to buy Woolworths shares for income.
Should you buy Woolworths shares for dividend income?
Over the past five years Woolworths has been rattled by competition. The investment in its Masters home improvement joint venture left it in disarray, while its leadership in supermarkets was being challenged by the likes of Coles and Aldi.
In that time, shareholders felt the left jab of a falling share price followed by the mean right hook from a significant cut to its dividend. All-in-all it has been a tough five years.
Down and out?
Although it has been hard going for the supermarket giant, there is a lot to like about Woolies.
It still commands a leadership stake in food and liquor. Indeed, it has shown recently that it is willing to drive down prices to keep its share of the market and assert some dominance.
However, there is now a fear that the company will not return to its former profit margins of 6%. In retailing, it's all about profit margins because it is a volume business.
Meaning, the difference between a 4% and 5% profit margin is a 25% increase in profits.
Unfortunately, it does not seem viable that any of the supermarket heavyweights will be able to maintain 5% profit margins. That's especially true with Aldi and – soon – Amazon making inroads for the market.
Foolish Takeaway
In my opinion, Woolworths shares are fully valued and the dividend yield leaves a lot to be desired. Therefore, I think there are better options available to investors who are willing to work a little harder.
