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Why income investors should avoid Woolworths Limited

Credit: GotCredit

With the share price of leading blue chip Woolworths Limited (ASX: WOW) hitting a fresh 52-week low on Monday of $23.09 and recording a fall of around 31% over the past 12 months, many shareholders will certainly be disappointed at their (unrealised) capital losses.

Perhaps most concerning of all is that many shareholders would have invested in Woolworths on the presumption that not only were they buying into a stock with defensive characteristics which would protect them from significant downside, but also that they were buying in to a company with near certainty as to the sustainability of its dividend payments.

Today, however those future dividend payments sit under a cloud of uncertainty.

According to data supplied by Thomson Consensus Estimates, the total dividend is forecast to decline from 130 cents per share (cps) in financial year (FY) 2015 to 113 cps in FY 2016, remain at 113 cps in FY 2017 before falling to 88.9 cps in FY 2018.

Based on today’s low of $23.09, while the historic yield is an attractive 5.6%, the current year yield is less so at a forecast 4.9%. Meanwhile, if the forecast for FY 2018 proves correct, shareholders would be looking at a future yield of just 3.8%.

Given the possibility that at current price levels the future yield on shares is just 3.8% fully franked it is unlikely to get many income investors excited making the potential for a near-term share price recovery seem unlikely.

With interest rates low and possibly going lower, the chase for yield seems set to continue. With the share prices of many blue chip stocks being supported based on their dividend yield the outlook for a dependable income stock such as Telstra Corporation Ltd (ASX: TLS) appears better than that of Woolworths.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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