Investors might be breathing a sigh of relief so far this Wednesday. The markets have actually opened in the green, and are giving investors some positive returns. At the time of writing, the S&P/ASX 200 Index (ASX: XJO) is up around 0.7% so far this morning. But that goodwill is not extending to the Coles Group Ltd (ASX: COL) share price so far. Coles shares are currently lower today, losing 0.4% so far at $17.43 a share.
Woolworths Group Ltd (ASX: WOW) shares are faring a little better. They are currently up 0.17% at $35.80. But for income investors, those metrics don't matter nearly as much as the dividend yields these two ASX stalwarts currently have on the table.
Coles is the clear winner here. On current pricing, Coles shares offer a dividend yield of 3.5%, which grosses-up to 5% if we include the value of Coles' full franking credits. In contrast, Woolworths shares are currently offering a dividend yield of 2.63% (or 3.76% grossed-up).
Consider this too. During earnings season last month, Coles managed to keep its interim dividend steady at 33 cents per share. Woolworths, on the other hand, gave its investors a dividend pay cut. It reduced its interim dividend to 39 cents per share, down 26.4% from last year's interim payment of 53 cents per share.
So those statistics alone certainly paint Coles in a better light than Woolies from an income perspective. But let's see if Coles is really the better dividend share to own.
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Coles vs Woolworths dividend: Does size really matter?
To do so, let's first examine both companies' payout ratios. That's the proportion of earnings that the company is paying out in dividends. A higher payout ratio means higher dividends, but also less cash to reinvest into the business for future growth. Future growth also tends to mean higher dividends over time. So if a company is sacrificing future growth for dividend payments now, it could actually result in lower dividends over time for investors.
So over the first half of FY2022, Woolworths delivered earnings per share (EPS) of 64.3 cents. Since Woolies paid out 39 of those cents as dividends, it puts its payout ratio at 60.65%.
Coles earned 41.2 in EPS over the same period. Since the company's interim dividend was 33 cents per share, that puts Coles' payout ratio at a far-higher 80.1%.
So that means Coles is doling out a far higher proportion of its earnings as dividends than Woolworths. That partially explains why its current dividend yield is so much higher. But as we discussed before, that doesn't necessarily mean that Coles is the better income share to own from now until Judgement Day. If the extra money that Woolies is reinvesting into its business is well spent, it could mean better results for shareholders down the road.
But it also proves that simply looking at metrics like dividend yields isn't where an astute investor should stop in their analysis.
At the current Coles share price, the ASX 200 grocery giant has a market capitalisation of $23.2 billion.
