Woolies dividend yield gets more appealing

Woolworths’ (ASX: WOW) share price dropped from its April all-time high of $36.84 to $31.58 yesterday. Over this time period Woolies shares have underperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) with a drop of nearly 10% compared with the index, which is down around 5.5%. This has placed the supermarket giant not only on a less demanding valuation of 17.6 times historic earnings but has also raised the dividend yield to 4.4%.

In comparison, Wesfarmers (ASX: WES) owner of Coles supermarkets, is currently trading on a trailing yield of 4.6%, while Metcash (ASX: MTS), the owner of the IGA banner, is currently priced on a significantly more enticing dividend yield of 7.8%.

Foolish takeaway

The recently sell-down in stocks is unlikely to be the end of the “chase for yield”, with weakness in blue chip shares likely to be met with renewed buying. Investors will have the opportunity to purchase oversold stocks, however they should remain aware of the risks of the “yield trade”.

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Motley Fool contributor Tim McArthur has no financial interest in any company mentioned in this article.

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