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.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Peter Stephens owns shares of Sainsbury (J). The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

A pastel colored growing graph with rising rocket.
Investing Articles

3 top shares for the ongoing stock market recovery

Although messy, I think the stock market recovery is beginning and that's why I'm now buying shares such as these.

Read more »

Mature people enjoying time together during road trip
Investing Articles

5 UK shares I bought for income of 9.5% a year

We recently bought these five cheap UK shares for their generous dividend yields. These cash payouts range from nearly 7%…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Is there still time to buy Scottish Mortgage shares?

The Scottish Mortgage share price has risen strongly in recent weeks. Should I pile into the FTSE 100 momentum stock…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

Why I’d start buying shares with £250 today not £20,000 in future!

Is it worth waiting to start buying shares until one has more money to invest? Our writer doesn't think so…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

I’ve bought Diageo shares to boost my long-term passive income!

I plan to hold on to my Diageo shares well into retirement. Here's why I think it's a top stock…

Read more »

New virtual money concept, Gold Bitcoins
Investing Articles

Down 61%, are Argo Blockchain shares worth buying?

Argo Blockchain shares have tumbled in value. As a shareholder, Christopher Ruane considers what might come next for the business…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 UK dividend stocks with yields over 10%

These dividend stocks are the highest yielders on the UK market, says Roland Head. But how safe are these generous…

Read more »

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »