Are Metcash shares worth buying for that fat 6% dividend yield?

Metcash may offer a high dividend yield, but is there anything else to like?

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Looking at the Metcash Limited (ASX: MTS) share price today, and it's likely that the first thing that will catch your eye with this ASX 200 consumer staples stock is Metcash's current dividend yield.

Metcash is having a pretty awful Wednesday, alongside the rest of the ASX 200 Index today. At present, the company has lost a painful 1.91% and is down to $3.59 a share. This fall has given the company's dividend yield a boost though. At this pricing, Metcash is trading on a whopping trailing dividend yield of 6.13%.

This dividend yield comes with full franking credits attached too, so grossed-up, investors are looking at a yield of 8.76%.

Compare Metcash's raw dividend yield to that of its peers in the grocery and hardware spaces.

Woolworths Group Ltd (ASX: WOW) currently trades with a dividend yield of just 2.95%.

Coles Group Ltd (ASX: COL) does better with its yield of 4.14%.

Bunnings owner Wesfarmers Ltd (ASX: WES) meets in the middle, with its present yield of 3.25%.

All of those yields come fully franked too. However, they don't really hold up against Metcash's monstrous yield.

So should dividend investors sell out of Coles and Woolies and flock into Metcash shares for dividend income today?

Is Metcash's 6% dividend yield too good to ignore?

I think there are two factors investors looking at Metcash shares for dividend income today need to consider.

Firstly, Metcash has a long history as a reliable dividend payer. It has paid a dividend every six months since 2017 and has usually delivered an annual pay rise too. In 2017, the company dished out 10.5 cents per share in dividends. But this had risen to 22 cents per share by 2023.

2023's payouts were a little behind those of 2022 (22.5 cents per share). But the company's overall income history tells a good story in my view.

Secondly, Metcash is, in my view, not nearly as strong a company compared with Coles, Woolworths or Wesfarmers.

To illustrate, last August saw Coles report a 5.9% rise in revenues for the 2023 financial year to $10.5 billion. Earnings from continuing operations rose 1.8% to $1.86 billion.

Woolies reported revenue growth of 5.7% over the same period to $64.29 billion, with earnings rising 15.8% to $3.12 billion.

Metcash unfortunately runs on a different calendar to these two businesses. But in December, the company revealed that its revenues for the six months to 31 October were up 1.3% to $7.84 billion. Earnings over the same period were down 3.4% to $246.5 million.

In the long term, Metcash has failed to grow revenues and compound earnings at anywhere near the same rate as its larger competitors.

This probably explains why the Metcash share price today trades at the same levels as it was back in mid-2005. Coles wasn't listed in its current form back then, but Woolworths shares have grown by 260% over the same period. Wesfarmers shares have also more than doubled since mid-2005.

Foolish takeaway

So all in all, I think there is a place for Metcash shares in an investor who relies on dividend income to live off. Retirees, for example, will probably appreciate the stonking dividend yield currently attached to the Metcash share price.

But there's a reason this dividend yield is so high – investors are simply pricing Metcash at a lower valuation than its better-performing rivals. So I think most investors who aren't at the stage of living off of their dividends can find better options elsewhere.

Motley Fool contributor Sebastian Bowen has positions in Wesfarmers. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has positions in and has recommended Coles Group and Wesfarmers. The Motley Fool Australia has recommended Metcash. 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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