Many ASX investors hold Woolworths Group Ltd (ASX: WOW) shares. This is understandable enough. Woolworths is a bonafide blue-chip share, one of the largest stocks on the ASX and is also a company that most of us are probably fairly familiar with as regular customers.
But does Woolworths really make the cut as a top ASX dividend share for income investors? After all, this company is currently trading on a dividend yield of just 2.75%.
Now 2.75% is nothing to turn one's nose up against. But it is also very much on the low side of dividend income potential when we compare it against other ASX 200 blue-chip shares.
For example, investing in any of the ASX bank shares right now will get you at least a 4.5% dividend yield – and nearly above 6% in the case of ANZ Group Holdings Ltd (ASX: ANZ).
The big miners BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) all have dividend yields above 5% right now.
And even Woolies' rivals in Coles Group Ltd (ASX: COL) and Metcash Limited (ASX: MTS) trounce the dividends available from Woolworths today. Coles currently offers a dividend yield of 4.21%, while Metcash has a whopping 5.92% on the table at present.
So are Woolies shares even worth holding for those investors who prioritise dividend income?
Well, there is one major argument to be made in favour of Woolworths shares being a part of a dividend portfolio. And one major argument against the company.
Let's dive in.
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Why Woolworths shares could be useful for ASX dividend investors?
Firstly, Woolworths has many of the attributes that dividend investors love. It operates in the resilient and defensive consumer staples sector. This means that the company's earnings base is extremely stable – we all need to eat and stock our households, after all. As such, Woolworths is both one of the most inflation-resistant ASX blue-chip shares, as well as being one of the most recession-proof.
This was illustrated by what happened during the COVID-19 pandemic and subsequent recession. While many ASX shares were slashing their dividends, Woolies was able to keep its income taps open and even boosted its fully-franked shareholder payouts in 2021.
Thus, I would say that if income certainty is one of your largest priorities when it comes to dividend shares, then Woolworths might well be worth holding in your dividend portfolio.
But let's turn to what might hold investors back from adding Woolworths shares to their income portfolios.
WOW, look at that price! Is this ASX 200 stock too expensive?
There's a good reason Woolworths' dividend yield is so low right now compared to its peers and other ASX blue chips. Put simply, Woolworths shares are expensive.
Right now, the company trades on a price-to-earnings (P/E) ratio of 28.5. That is more than a 40% premium over Woolies' arch-rival Coles, which is on an earnings multiple of 19.76 at present. And it makes Metcash look like a bargain-bin stock with its current P/E ratio of 13.97.
The argument over whether Woolies shares deserve to trade at such a significant premium to its rivals is one for another day. But this pricing premium is almost single-handedly responsible for the company's seemingly low dividend yield. Remember, a share's dividend yield is both a function of a company's raw dividends per share, as well as its share price.
So if income certainly isn't a huge deal for you, I would probably avoid including Woolworths shares in a dividend-focused portfolio. If I had to choose between Woolies and Coles today, I would probably go with Coles just for that cheaper share price, especially if I were prioritising dividend income.
That's despite my belief that Woolworths is a superior business to that of Coles. But until Woolies comes down from a P/E ratio close to 30, it's too expensive for this writer.
