Large-cap dividend shares are often cited as a great option for investors looking to secure a steady income stream. However, while some remain steady and reliable, others fall in and out of favour.
I watch developments closely to catch the most promising stocks as market conditions change. With emerging tech stocks struggling in the US and Japan, investors may be shifting back to reliable UK stocks.
Now, two stocks I’ve had my eye on for some time might be ready to rally.
Our beloved grocer
Sainsbury’s (LSE: SBRY) has long been considered a good dividend payer but performance lately has been less impressive. The grocer’s FY24 earnings results revealed a 40% decline in profit margins and earnings per share (EPS) down to 5.9p from 9p. This was reflected in the share price, which fell 16% in the first half of the year.
More recently though, things have been looking up. After spending most of this year below 280p, the price shot up 11.2% in the past month to 299p.
It looks like the current market volatility is prompting investors to shift focus towards defensive stocks. As one of the UK’s largest and oldest supermarket chains, Sainsbury’s fits the bill. A recent report from data analysis firm Kantar says UK grocery inflation is on the decline. According to the same report, Sainsbury’s market share climbed 50 basis points to 15.3% in the 12 weeks to 4 August.
But while the 4.4% yield is attractive, its payout ratio is very high at 223%. If earnings don’t improve it may struggle to cover future dividend payments. I’ve seen forecasts that earnings could grow 25% per year going forward, but I’m still wary.
For now, I’ll hold off buying until the payout ratio decreases.
The insurance giant
Aviva (LSE: AV) is another homegrown dividend stock that looks ready to take off. With a £13.2bn market cap, the insurance giant is the third-largest in the UK, close behind Legal & General.
I’ve previously been a shareholder but sold my shares to fund a more promising opportunity. Looking back, it may have been wiser to sell something else. I didn’t lose any money in the exchange but now I’m considering buying back in at a higher price.
Not the smartest move!
Still, if it could prove profitable then why not?
The share price is up 24.4% over the past five years and doesn’t show any signs of an imminent reversal. Couple that steady growth with a 7% dividend yield and the value proposition is obvious. What’s more, based on future cash flow estimates, the price could be undervalued by 47%.
Sounds like a no-brainer. So what’s the catch?
Mainly, a fierce and competitive industry. Major firms like Legal & General and Prudential dominate their share of the insurance market, giving Aviva a run for its money. It’s the third-largest insurance company on the FTSE 100 with only the fourth highest dividend yield, so other stocks offer an attractive alternative.
But right now, valuation metrics indicate stronger evidence of growth potential for Aviva than its competitors. Its price-to-earnings (P/E) ratio is a market-beating 10.3, far below Prudential at 24.4 and Legal & General at 46.7.
For me, that’s a strong sign that the price could increase from current levels so I plan to buy the shares this month.
