Wesfarmers Ltd (ASX: WES) shares are often seen as a cornerstone stock for long-term Australian investors, and for good reason.
With a diversified portfolio led by Bunnings, Kmart Group, and Officeworks, the company has built a reputation for reliable earnings and dividends.
But does that make Wesfarmers shares a good buy for passive income today?
Long history of payouts
At current prices of $86.19, Wesfarmers shares offer a dividend yield of roughly 2.5%. While that's not the highest yield on the ASX, dividends are fully franked, which meaningfully lifts the effective yield for many investors.
The company pays dividends twice a year. The company has a long history of maintaining or gradually increasing payouts, particularly since the Coles Group Ltd (ASX: COL) demerger simplified the business and improved cash flows.
Steady, sustainable dividends
Wesfarmers' dividend policy is conservative and earnings-linked. Management prioritises balance sheet strength and reinvestment while returning surplus capital to shareholders when conditions allow.
Wesfarmers' approach has resulted in steady, sustainable dividends rather than aggressive payout growth, which tends to appeal to long-term income investors. The forecast on CommSec suggests a grossed-up yield of 3.7%, including franking credits.
Effective profit machine
The company's biggest strength lies in its cash-generating retail businesses. Bunnings remains a dominant force in home improvement, while Kmart continues to gain market share through its low-cost model.
Wesfarmers continues to find new places to invest for long-term earnings growth, and this makes it a very compelling business. Initiatives include healthcare expansion, selling Anko products internationally, product expansion in Bunnings, and lithium mining.
Wesfarmers shares are not the most defensive stock on the ASX, but the company stands out with a return on equity above 30%. This highlights how effectively the $95 billion company generates profits from the capital retained rather than paid out to shareholders.
Wesfarmers' diversification provides resilience during economic slowdowns and supports ongoing dividend payments. A strong balance sheet and disciplined capital allocation further underpin income reliability.
Slow dividend growth
That said, Wesfarmers shares aren't without weaknesses. The headline yield is modest compared to higher-yielding sectors like banks or utilities, and dividend growth is unlikely to be rapid.
Earnings are also exposed to consumer spending cycles, meaning prolonged cost-of-living pressures could weigh on margins and slow dividend increases. Valuation is another consideration, with the stock often trading at a premium due to its quality and defensive appeal.
What next for Wesfarmers shares?
From an analyst perspective, expectations lean toward moderate returns rather than outsized gains. Most forecasts point to continued earnings and dividend growth, but at a measured pace.
Share price upside is generally viewed as limited in the near term, placing the emphasis squarely on income stability and long-term compounding rather than quick capital gains. The average 12-month price target is $81.57, 5% below the current share price.
Foolish Takeaway
Overall, Wesfarmers looks well-suited to investors seeking dependable, fully-franked income backed by high-quality businesses.
It may not deliver a standout yield today, but for passive investors who value reliability and gradual growth, Wesfarmers remains a solid option.
