Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) shares are both contenders as two of the most reliable businesses on the ASX, in my view.
We all need to eat, and this pair of supermarket stocks benefits from being the biggest, offering customers convenience and scale.
If the underlying profit is resilient, then the dividend can be resilient, too (and grow).
Coles and Woolworths have both benefited from the inflationary period because it boosted their revenue for the same basket of items. The population growth we've seen over the past two years also increases the number of potential supermarket shoppers in the country.
With food inflation now slowing, it's now worth asking what the future dividend payments could be and whether Coles shares or Woolworths shares are more appealing.
Recent dividend history
The Woolworths dividend has not been very consistent over the past decade, with a few reductions along the way. The recent FY24 result saw the final ordinary dividend reduced by 1.7% to 57 cents per share, but it also paid a special dividend per share of 40 cents.
FY22 also saw a dividend reduction for owners of Woolworths shares, but this was largely due to the separation of Endeavour Group Ltd (ASX: EDV), so there were fewer profit-generating businesses within Woolworths Group in FY22 onwards.
Coles has a much clearer dividend history. It has grown its annual dividend per share every year since FY19 after its separation from Wesfarmers Ltd (ASX: WES).
In FY24, Coles grew its final dividend by 6.7% to 32 cents per share and the full-year dividend was increased by 3% to 68 cents per share.
Payout forecasts
The broker UBS is expecting Woolworths to reduce its annual ordinary dividend from $1.04 per share in FY24 to 98 cents per share in FY25 with a forecast of lower net profit due to higher interest costs (following the acquisitions of Petstock and PFD) and inflation of other costs including the supply chain.
At the current Woolworths share price, the forecast FY25 payout translates into a fully franked dividend yield of 2.8% and a grossed-up dividend yield of 4%.
In the subsequent financial years of FY26, FY27 and FY28, Woolworths is forecast to pay annual dividends per share of $1.05, $1.16 and $1.26, respectively. This would translate into grossed-up dividend yields of 4.3%, 4.8% and 5.2%.
Looking at the UBS forecasts for Coles shares, the predictions are even more appealing on the dividend income side of things.
According to UBS, the Coles dividend per share is expected to jump to 73 cents per share in FY25, which would be a grossed-up dividend yield of 5.5%. The Coles dividend yield in the current financial year is expected to be larger than Woolworths' FY28 yield.
Coles' payout per share could rise to 85 cents in FY26, 95 cents in FY27 and $1 in FY28. That equates to grossed-up dividend yields of 6.4%, 7.1% and 7.5%, respectively.
UBS said the Coles supermarket earnings before interest and tax (EBIT) outlook "remains strong", and its new distribution centres (DCs) are progressing. These new advanced DCs should help with efficiencies and stock flow.
Foolish takeaway
It's clear that Coles has delivered a more consistent dividend over the past five years and is expected to grow its payout strongly in the next few years, delivering a stronger yield. Coles shares would be my choice for dividends compared to Woolworths shares.
UBS currently rates Woolworths as neutral and has a buy rating on Coles shares.
