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Are Coles (ASX:COL) or Woolworths (ASX:WOW) shares a better ASX dividend buy today?

Choice of ASX dividend shares represented by woman holding up two hands looking confused
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Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) are two ASX companies with very similar characteristics. Together, both essentially hold an duopoly over the Australian supermarket/grocery market, albeit against small market shares held by both the German-owned Aldi, and the Metcash Limited (ASX: MTS)-owned IGA.

In addition, both companies have tie-ups with petrol retailers, and both have a presence in the liquor/bottleshop market with names like Dan Murphy’s (Woolworths) and Liquorland (Coles). However, Woolworths also owns the Big W store chain, as well as the ALH Group — which in turn owns a network of pubs and hotels.

Due to its larger share in the Aussie grocery market, as well as its additional assets like Big W, Woolworths is by far the larger company today. Woolies, on current prices, has a market capitalisation of $48.34 billion, whereas Coles has a market cap of $22.8 billion.

Both Coles and Woolies are large, established and mature businesses that have been around longer than most people alive today. As such, most investors don’t really buy these companies for their growth prospects, but rather for their dividend income potential.

But since Coles and Woolworths have such similar business characteristics — offering defensive, largely recession-proof earnings bases — I think we should compare the dividend prospects for both companies today.

So let’s dig in.

Coles vs Woolworths: Which is a better dividend buy?

On current pricing, Coles is offering a trailing dividend yield of 3.37%. That number is based on Coles’ two most recent dividends – a February interim payout of 30 cents per share (cps), and an August final payout of 27.5 cps.

In contrast, Woolworths shares are currently offering a trailing yield of 2.45%. That number is based on Woolworths’ two most recent dividends – a March interim payout of 46 cps, and a September final payout of 48 cps.

Both dividends come fully franked, so Coles’ dividend grosses-up to 4.81% with full franking credits, while Woolies grosses-up to 3.5%.

On these raw numbers, Coles appears to be the winner.

But let’s look at both companies’ recent dividend history as well. Coles’ August final dividend was a 14.5% increase on its 2019 final dividend of 24 cps, whilst its interim dividend in 2020 was the first the company paid since its spin-off from old parent, Wesfarmers Ltd (ASX: WES).

In contrast, Woolworths’ final dividend of 48cps was a 15.8% cut from the 57 cps dividend the company paid in 2019. Its March interim payout was a 2.22% increase from 2019’s interim payout of 45 cps.

Foolish takeaway

Since Coles both offers a higher starting dividend yield on current prices today, as well as offering dividend growth in 2020 (as opposed to Woolworths’ cuts), I have to conclude that Coles offers a better deal for dividend investors right now. The difference between a grossed-up yield of 4.81% and 3.5% is not insignificant, so if you’re looking to add one of these companies to an ASX dividend share portfolio, I would go with Coles today.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET, Wesfarmers Limited, and Woolworths Limited. 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 Scott Phillips.

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