Are Woolworths shares worth buying for dividend income or not?

Is the passive income good enough to pursue the supermarket business for?

| More on:
A man looks a little perplexed as he holds his hand to his head as if thinking about something as he stands in the aisle of a supermarket.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Woolworths is expected to pay a dividend yield of more than 4%
  • However, sales in the first quarter of FY23 were a bit mixed
  • I think Coles looks like a better pick today

Woolworths Group Ltd (ASX: WOW) shares are known for paying dividends to shareholders. But, is the dividend income good enough to invest in the leading supermarket business?

Firstly, I think it's worth noting that we shouldn't invest in a business just because of the income. I think the share price needs to make sense as well at a good price.

The Woolworths share price has seen plenty of volatility over the last year, as we can see on the chart below.

Created with Highcharts 11.4.3Woolworths Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

The great thing about dividends is that they can be much more consistent than the share price. While the board gets to decide on what level of dividend to play, it is still dependent on profit generation for sustainable payments.

Woolworths dividend projections

Using the estimates on Commsec, Woolworths is projected to pay an annual dividend per share of around $1.01 in FY23. If it does pay that, then it will translate into a grossed-up dividend yield of 4.25%.

But, we should look at more than just what's going to happen this year. In 2024, Woolworths is projected to pay an annual dividend per share of $1.12. This could translate into a grossed-up dividend yield of 4.7%.

Recent trading

The latest investors have heard is the sales update for the first quarter of FY23. Group sales increased by 1.8% to $13.36 billion.

But, there was a mix of performance. Australian supermarket sales fell 0.5% despite 7.3% inflation. Australian business to business (B2B) sales were up 26% to $1.2 billion. New Zealand supermarket sales fell 8.1% in Australian dollar terms to $1.8 billion, and 2.5% in New Zealand dollar terms to $2 billion. Big W sales jumped by 30.1% to $1.2 billion.

With that period being compared to a locked down time last year, it was hard for the supermarkets to surpass that performance, whereas a return to normal life seems to have helped the B2B and Big W retail sales.

However, Woolworths did say that in October, the first month of the second quarter, year over year sales growth in Australian supermarkets had improved as it cycled out of the NSW and Victorian lockdowns last year.

Is it time to buy Woolworths shares for dividend income?

A 4% dividend yield isn't bad, but I don't think it's enough to get excited about. If Woolworths is going to be a good investment from here, I think it will be capital growth that makes up the majority of the return.

Woolworths shares are currently valued at 25 times FY23's estimated earnings. I like the move by the business to buy a majority stake of PETstock's owner. This could help the company diversify and grow its earnings.

However, in the sector, I think I would rather look at Coles Group Ltd (ASX: COL). Using Commsec, estimates, it's valued at 21 times FY23's estimated earnings with a potential grossed-up dividend yield of 5.5%. Coles shares look both cheaper and could pay a bigger dividend.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Consumer Staples & Discretionary Shares

A man sits in a chair hunched over a laptop and covered head to toe in frozen icicles to represent Envirosuite's trading halt
Consumer Staples & Discretionary Shares

PointsBet share price frozen amid takeover update

Is a superior proposal on the way?

Read more »

High fashion look. glamor closeup portrait of beautiful sexy stylish Caucasian young woman model with bright makeup, with red lips, with perfect clean skin.
Consumer Staples & Discretionary Shares

Is the consumer discretionary sector back in favour after interest rate cuts?

One broker has named its best buys.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Consumer Staples & Discretionary Shares

Treasury Wine shares tumble on big US news

10% of its net sales revenue is under threat because of this news.

Read more »

group of students working together
Share Market News

Guess which ASX 200 stock is crashing 38% on market update

This stock is having a day to forget on Tuesday. Let's find out why.

Read more »

A gambler at a casino bets a pile of chips on one number
Consumer Staples & Discretionary Shares

Own Star Entertainment shares? 12 things to weigh up before voting on takeover

Let's take a look.

Read more »

A car dealer stands amid a selection of cars parked in a showroom.
Broker Notes

Up 77% in a year, guess how much more upside Macquarie tips for Eagers Automotive shares

Macquarie released its latest analysis on Eagers Automotive fast rising shares this morning.

Read more »

A farmer looks backwards towards his crops.
Consumer Staples & Discretionary Shares

Elders shares result: The good, the not so good and the interesting, according to Macquarie

It was a mixed half for the agribusiness company. Here's Macquarie's take.

Read more »

Young man sitting at a table in front of a row of pokie machines staring intently at a laptop. looking at the Crown Resorts share price
Consumer Staples & Discretionary Shares

Takeover terms found unfair to Star Entertainment shares investors but the 'only lifeline' left

Star has released the independent expert's report into the Bally's takeover deal and set a date for the vote.

Read more »