Is Wesfarmers stock a buy for its 3.6% dividend yield?

Investors can buy a variety of blue-chips on the ASX, with Wesfarmers Ltd (ASX: WES) stock being a popular option. The owner of Bunnings and Kmart may not be the biggest business on the ASX, but there are reasons to think it's one of the more appealing for its dividend yield.

I like it when a company can provide investors with growing dividends and capital growth as that can lead to compelling total returns. Dividends are a powerful form of passive income and Wesfarmers is one of the leaders of the ASX at providing payouts.

Let's take a look at whether it's an appealing option for its dividend yield.

Impressive passive income record

The company is committed to growing its payout for shareholders over time. Wesfarmers has an ultimate goal of delivering satisfactory returns to shareholders, and dividends are a part of that.

It wants to invest in businesses where there are opportunities, and acquire or divest businesses to increase long-term shareholder wealth. Management also manages the company's balance sheet to achieve an appropriate risk profile and optimise the cost of capital, while maintaining the flexibility to take advantage of opportunities as they arise.

In terms of dividends, Wesfarmers stated on its website:

As well as share price appreciation, Wesfarmers seeks to grow dividends over time commensurate with performance in earnings and cash flow.

The company has grown its annual dividend per share each year since divesting the Coles Group Ltd (ASX: COL) business. Not many ASX blue-chip shares can say they've increased their payout every year since 2020.

The latest annual dividend per share in FY25 came to $2.06, representing a year-over-year increase of 4%. At the current Wesfarmers stock price, that represents a grossed-up dividend yield of 3.6%, including franking credits.

On the dividend side if things, the payout isn't significant or attractive. But, growth is expected in the 2026 financial year and 2027 financial year.

According to the projection on Commsec, Wesfarmers is forecast to pay an annual dividend per share of $2.39 in FY27. That translates into a potential future grossed-up dividend yield of 4.2%, including franking credits.

Is the Wesfarmers stock price a buy?

From my perspective, Wesfarmers is one of the highest-quality businesses around because of the strong returns on capital (ROC) that Bunnings and Kmart deliver for Wesfarmers, enabling the business to deliver a return on equity (ROE) of more than 30%.

Over time, I'm expecting Wesfarmers to deliver strong levels of earnings thanks its ability to invest in its growing segments and unlock further opportunities in new areas such as healthcare, lithium mining and Anko retailing in the Philippines. In five years, I think there will be more businesses in the Wesfarmers stable.

I think it can deliver over the long-term, however, it's priced at 33x FY26's estimated earnings – this is higher than the price/earnings (P/E) ratio has been over the long-term.

Additionally, according to Commsec, there are currently six analyst sell ratings on the business, seven hold ratings and one buy rating. In other words, the experts are seeing better value elsewhere.

The post Is Wesfarmers stock a buy for its 3.6% dividend yield? appeared first on The Motley Fool Australia.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Wesfarmers. The Motley Fool Australia has recommended Wesfarmers. 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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