The Coles Group Ltd (ASX: COL) share price has risen more than 20% in the past year. I believe it's an attractive option for passive income with a dividend yield that could reach 7% in the coming years.
Coles is best-known for its national supermarket network, but there are other businesses inside the group, including Coles Liquor, First Choice Liquor, Liquorland, Vintage Cellars, Coles Financial Services, and a 50% stake in Flybuys.
This business has already built an impressive dividend record – the annual pay out has grown each year since 2019. That's not too surprising to me, considering it operates in the very defensive sector of food retailing. As long as the number of consumers going through its supermarkets continues increasing, it has solid earnings tailwinds.
But how high could the dividend go? Let's take a look at what UBS is projecting.
Projected Coles dividend yield
We'll start with the projection for the 2025 financial year, which is nearly over.
UBS is currently forecasting that Coles could decide to pay a dividend per share of 72 cents in FY25, which would translate into a grossed-up dividend yield of 4.9%, including franking credits.
Pleasingly, the broker is predicting that Coles' net profit and dividend can rise every year between FY25 to FY29.
If UBS is correct with its estimates, the supermarket business could pay a dividend per share of $1.05 in the 2029 financial year. That would translate into a grossed-up dividend yield of 7.1%, including franking credits.
What could drive the supermarket business higher?
UBS is optimistic about the company's ability to continue growing sales in the coming years.
The broker said that execution is a "key driver" of strong sales. This could then help the net profit, the Coles share price, and the dividend yield. There are three things that UBS pointed to.
First, the Witron automated distribution centres in Brisbane and Sydney are helping with increased availability across both slow-moving items and promotions.
Second, UBS pointed to store-specific ranges being rolled out.
Third, Coles has a "greater replenishment focus".
The broker also noted that Coles achieved 25.7% growth of online sales in the third quarter of FY25, which is being helped by the new Ocado customer fulfilment centres.
UBS concluded:
Looking forward, the significant investments over recent years, especially Witron & Ocado, are expected to drive medium-term sales growth, with this upside arguably underappreciated.
