Woolworths Group Ltd (ASX: WOW) shares are known for paying dividends to shareholders. But, is the dividend income good enough to invest in the leading supermarket business?
Firstly, I think it's worth noting that we shouldn't invest in a business just because of the income. I think the share price needs to make sense as well at a good price.
The Woolworths share price has seen plenty of volatility over the last year, as we can see on the chart below.
The great thing about dividends is that they can be much more consistent than the share price. While the board gets to decide on what level of dividend to play, it is still dependent on profit generation for sustainable payments.
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Woolworths dividend projections
Using the estimates on Commsec, Woolworths is projected to pay an annual dividend per share of around $1.01 in FY23. If it does pay that, then it will translate into a grossed-up dividend yield of 4.25%.
But, we should look at more than just what's going to happen this year. In 2024, Woolworths is projected to pay an annual dividend per share of $1.12. This could translate into a grossed-up dividend yield of 4.7%.
Recent trading
The latest investors have heard is the sales update for the first quarter of FY23. Group sales increased by 1.8% to $13.36 billion.
But, there was a mix of performance. Australian supermarket sales fell 0.5% despite 7.3% inflation. Australian business to business (B2B) sales were up 26% to $1.2 billion. New Zealand supermarket sales fell 8.1% in Australian dollar terms to $1.8 billion, and 2.5% in New Zealand dollar terms to $2 billion. Big W sales jumped by 30.1% to $1.2 billion.
With that period being compared to a locked down time last year, it was hard for the supermarkets to surpass that performance, whereas a return to normal life seems to have helped the B2B and Big W retail sales.
However, Woolworths did say that in October, the first month of the second quarter, year over year sales growth in Australian supermarkets had improved as it cycled out of the NSW and Victorian lockdowns last year.
Is it time to buy Woolworths shares for dividend income?
A 4% dividend yield isn't bad, but I don't think it's enough to get excited about. If Woolworths is going to be a good investment from here, I think it will be capital growth that makes up the majority of the return.
Woolworths shares are currently valued at 25 times FY23's estimated earnings. I like the move by the business to buy a majority stake of PETstock's owner. This could help the company diversify and grow its earnings.
However, in the sector, I think I would rather look at Coles Group Ltd (ASX: COL). Using Commsec, estimates, it's valued at 21 times FY23's estimated earnings with a potential grossed-up dividend yield of 5.5%. Coles shares look both cheaper and could pay a bigger dividend.
