Forget buy-to-let! Why I feel Sainsbury’s is a FTSE 100 dividend stock that could make your cash work harder

J Sainsbury plc (LON: SBRY) could outperform the FTSE 100 (INDEXFTSE:UKX) and buy-to-let investments.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Hand holding pound notes

Image source: Getty Images.

The income investing prospects of the FTSE 100 continue to be relatively appealing. It currently yields over 4%, which may make it a better option than a buy-to-let, given the tax changes being made to the latter.

Of course, it’s possible to generate a higher yield than 4% over the long run. One company which could do just that is J Sainsbury (LSE: SBRY). The supermarket giant’s growth strategy could lead to a higher dividend, which may make it relatively appealing at a time when a number of FTSE 100 and FTSE 250 stocks appear to be somewhat overvalued after a 10-year bull market.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

High price

One company which could be overvalued at the present time is engineering and industrial software specialist Aveva (LSE: AVV). It released a trading update on Thursday that showed it has continued to perform well during the first half of its financial year. Its growth included the impact of good sales execution, with a number of contracts being brought forward into the first half, and some benefit of upfront revenue recognition delivered on multiyear rental contracts.

Encouragingly, the integration of the heritage Aveva and Schneider Electric industrial software business remains on track. Progress in implementing costs-saving initiatives has been made, with the financial benefits of the process set to be seen in the second half of the year.

Aveva is forecast to post a rise in earnings of 12% in the next financial year. While its performance is encouraging and its outlook is positive, it trades on a price-to-earnings (P/E) ratio of 39 and has a dividend yield of 1.8%. These figures suggest that although it may be making progress from a business perspective, it seems to lack investment appeal – especially from an income perspective.

Improving outlook

In contrast, the investment potential of Sainsbury’s continues to improve. Its acquisition of Asda could prove to be a gamechanger in the UK retail industry, providing synergies and cost benefits over the long run. At a time when the expansion of other retailers such as Lidl and Aldi is continuing apace, the merged entity may be able to enjoy wider margins, or more competitive pricing potential over the coming years.

With Sainsbury’s having a dividend yield of 3.5%, it’s not the highest-yielding share in the FTSE 100. However, it has the potential to raise dividends at a rapid rate. Dividends are currently covered almost twice by profit, which suggests that they could rise at a faster pace than the company’s bottom line without hurting its financial standing. And with the potentially positive impact of the Asda acquisition, as well as the cross-selling opportunities from Argos, the long-term investment prospects for the business appear to be sound.

Of course, UK consumer confidence remains weak, and could deteriorate further as Brexit progresses. But with what seems to be a strong growth outlook, the retailer could offer better dividend prospects than the FTSE 100 and a buy-to-let.

More on Investing Articles

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

£10,000 invested in BT shares 10 years ago is now worth this much

It's painful to remember that BT shares reached over £10 at the peak of the dot com bubble in 1999.…

Read more »

Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Investing Articles

Is now the time to buy bank shares?

Our writer considers whether bank shares could be a bargain buy for his portfolio right now -- or a potential…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

After steep falls, are Royal Mail shares a steal?

Royal Mail shares have more than halved since peaking a year ago. After months of steep falls, this popular stock…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Dirt-cheap, 1 of my best stocks to buy also pays an above-average dividend!

This Fool has decided to buy the shares on his best stocks to buy now list with the shares looking…

Read more »

Light bulb with growing tree.
Investing Articles

The AFC share price just tanked! Is now the time to buy?

The AFC share price fell nearly 10% on Wednesday after the H1 revenue announcement. So, should I add this stock…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

These shares have been growing dividends for decades. I’d buy!

Our writer considers the merits for his portfolio of buying two shares with a track record of growing dividends.

Read more »

Close-up of British bank notes
Investing Articles

Is the M&G dividend yield heading to 10%?

As the M&G dividend yield heads towards double digits, out writer explains why he is considering buying more of the…

Read more »

man in shirt using computer and smiling while working in the office
Investing Articles

3 top dividend shares to buy now

With weakness in the markets, I reckon it's a good time to search for top dividend shares to buy now.

Read more »