With a 5% dividend yield, is the Coles share price a buy?

Is this stock worth putting in the shopping basket?

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The Coles Group Ltd (ASX: COL) share price has dipped over the past two weeks, falling by more than 7% from 27 February 2025. This has had the pleasing effect of boosting the dividend yield on offer.

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Not only does a lower valuation mean the investment is cheaper, but it can noticeably improve the potential passive income. For example, if a business had a dividend yield of 5% and then the share price fell 10%, the dividend yield would become 5.5%. That dynamic has occurred with the Coles dividend yield.

It's worth asking if the business should appeal to passive income investors.  

Coles dividend credentials

Impressively, the business has grown its annual dividend per share each year since 2019, when it first started paying one. During the COVID-19 and high inflation periods of the last few years, numerous businesses cut their dividends at least once. Coles has continued increasing its dividends for investors, which is pleasing for investors wanting reliable income.

In the FY25 half-year result, the board of directors decided to increase the interim dividend per share by 2.8% to 37 cents.

At the current Coles share price, that payout alone represents a grossed-up dividend yield of 2.8%, including franking credits.

The business's last two declared dividends yielded 5.2% gross-up, including franking credits.

While that's not a huge yield, I'll note that it's better than what's available from term deposits following the Reserve Bank of Australia (RBA) interest rate cut.

Could owners of Coles shares see further passive income growth?

The company's dividend success is largely due to its stable and growing earnings. In my view, food retailing is a very defensive industry – we all need to eat.

The broker UBS is forecasting that Coles' profit and dividends will continue to grow for years to come.

In FY25, the supermarket business is predicted to achieve a net profit of $1.1 billion and pay an annual dividend per share of 72 cents. Over the subsequent two years, Coles is forecast to grow its profit by 25% to $1.4 billion, which could fund a dividend per share of 94 cents, representing a 30% growth between FY25 and FY27.

That possible FY27 grossed-up dividend yield could be 7.1%, including franking credits.

Is the ASX supermarket stock a buy?

The business is predicted to steadily grow its profit each year between FY25 and FY29, with rising revenue and improved efficiencies from its new high-tech distribution centres, which could lead to stronger profit margins.

That's what I like to see from a good blue-chip ASX share. It's not as cheap as it was – the Coles share price is now valued at 22x FY25's estimated earnings. I'd still be willing to buy shares at this level for the dividends.

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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.

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