These British dividend shares offer yields way above the 3.8% FTSE 100 average. So which one should I invest in today?
J Sainsbury
FTSE 100-listed Sainsbury’s (LSE:SBRY) is one of the UK’s favourite supermarkets. Its reputation for quality, and the immense attraction of its Nectar loyalty scheme, mean it’s the country’s second-biggest grocer by market share.
However, the earnings outlook here is pretty bleak as the cost-of-living crisis worsens. Not even spending on essentials like food and household essentials is safe as consumers tighten their belts.
This bodes badly for Sainsbury’s as more of its customers are likely to head for discount chains. Colossal inflation meant its sales rose 10.5% in the four weeks to 14 May (according to Kantar Worldpanel data). But value chains Aldi and Lidl grew revenues 24% and 23.2% respectively, with sales helped by ongoing store expansion.
Sainsbury’s can of course slash prices to boost the top line. Indeed, it has recently announced rolling out exclusive prices to Nectar members in an effort to copy Tesco’s popular ‘Clubcard Prices’ scheme.
However, further discounting will only heap extra pressure on the retailer’s already-wafer-thin profit margins. Its retail underlying operating margin sank 41 basis points to 2.99% in the financial year to February.
This caused underlying pre-tax profit to drop 5% to £690m. And it’s difficult to see how Sainsbury’s will start growing earnings robustly again as competition in its markets heats up.
So I’m happy to ignore the retailer’s 4.7% forward dividend yield and buy other income shares.
Residential Secure Income REIT
In the current climate, buying shares in residential property companies could be a better idea. Residential Secure Income (LSE:RESI) is one such company I’m considering increasing my existing stake in.
We all need a place to live, so revenues across the private rental sector remain stable, even during tough periods like today. In fact, rent rolls are soaring right now as the market’s supply and demand imbalance worsens.
Data from the Royal Institution of Chartered Surveyors (RICS) this week showed 44% of its members witnessed increased renter demand in May. Its report also showed an increase in the number of private landlords looking to sell up and a lack of interest from new buy-to-let investors.
This is feeding into the hands of the firms like Residential Secure Income. This week the business announced a 6.2% rise in like-for-like rents between October and March, up 2% year on year.
A blend of weak housebuilding rates in the UK and a rising population means rents look set to keep rising for some time. Accordingly, I expect this UK share to keep delivering healthy profits growth and big dividends. Under real estate investment trust (REIT) rules it has to pay at least 90% of annual rental profits out in the form of dividends.
For this financial year (to September) the firm offers a large 7.6% dividend yield. Soaring construction costs could take a bite out of profits. But I still expect it to provide me with excellent long-term passive income.
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