Woolworths Group Ltd (ASX: WOW) shares and Coles Group Ltd (ASX: COL) shares both pay dividends to their shareholders.
Yet, these days, the two businesses are not as similar as they used to be.
Woolworths operates the Australian Woolworths supermarkets, Countdown supermarkets in New Zealand, business-to-business suppliers, and the retailer Big W.
Meantime, Coles runs Coles supermarkets in Australia, its Coles Express business, and the company owns a number of liquor retailers like First Choice Liquor, Liquorland, and Vintage Cellars.
According to the ASX, the market capitalisation of Coles is around $23 billion while Woolworths has a market capitalisation of around $42 billion.
The big question is which one has a higher dividend yield? So let's look at that first.
Dividend yield
Looking at the numbers from FY22, Woolworths paid an annual dividend per share of 92 cents. That equates to a grossed-up dividend yield of 3.75%.
Coles paid an annual dividend per share of 63 cents per share. That translates into a grossed-up dividend yield of 5.25%.
As we can see, in terms of the current yield, Coles is the clear winner compared to Woolworths.
Valuation difference
A key statistic that can help investors compare businesses is the price/earnings (p/e) ratio. This shows what multiple of earnings the share price is valued at.
Using the estimated earnings for FY23 is probably the better measure to use rather than the last financial year because markets are usually forward-looking. It's the next financial year that investors are typically focused on and valuing the business at, rather than the last year.
According to Commsec, the Coles share price is valued at under 22 times FY23's estimated earnings. The Woolworths share price is valued at under 26 times FY23's estimated earnings. The fact is that Woolworths is measurably more expensive than Coles.
What about future dividends?
However, what happened in FY22 is only a small amount of time compared to the long-term future of these businesses.
While it's impossible to know what the future will be, we can certainly guess what future dividends will be.
Using the estimates on Commsec, Woolworths shares are expected to pay an annual dividend per share of $1.01 in FY23. This would represent a grossed-up dividend yield of 4.1%.
Then, in FY24, it could end up paying an annual dividend per share of around $1.12. This would represent a grossed-up dividend yield of 4.6%.
Let's compare how much Coles shares may dish out in dividends.
Commsec suggests that Coles may pay an annual dividend per share of 65 cents in FY23 and 66 cents in FY24. This would represent forward grossed-up dividend yields of 5.4% and 5.5%, respectively.
Foolish takeaway
It seems that Coles shares are going to be the better source of dividends in the next few years. But that may not necessarily mean that Woolworths shares will produce smaller total returns. Woolworths may be able to achieve stronger earnings per share (EPS) growth, leading to more attractive share price growth.
