With interest rates remaining at historic lows, life continues to be challenging for people seeking a decent income from their capital. Indeed, the best savings rate I can find on an instant access, internet-based bank account is just 2% gross. With inflation being above this, savers are losing out in real terms and have been for a good few years.
Of course, many income-seeking investors have been put off from investing in the stock market to gain a more attractive yield as a result of high levels of volatility. Certainly, the value of capital invested in shares will fluctuate a lot more than that deposited in a bank account. However, I believe that the fear generated by such volatility can be reduced through buying shares in defensive companies, such as J Sainsbury (LSE: SBRY) (NASDAQOTH.JSAIY.US).
The main reason for this is the nature of its business. As you are doubtless aware, its main focus is the sale of food, although it has diversified in recent years into non-food items — notably, clothing. Such goods are highly defensive, since people will always need them no matter what the state of the economy. This means that, although the share price may fluctuate, the underlying business should be fairly steady.
In addition, dividends should continue to be paid, even if the stock market falls significantly. Sainsbury’s increased its total dividend per share throughout the credit crunch and currently pays out 52% of earnings as dividends. Clearly, there is scope for this to increase, although a yield of 4.4% is hardly shabby and places it at 14th in the list of highest-yielding FTSE 100 stocks.
Interestingly, Sainsbury’s trades on a discount to the FTSE 100 price-to-earnings (P/E) ratio of 13.1, currently having a P/E of 11.9. This, combined with forecast earnings per share growth of just under 5% over the next two years, means that Sainsbury’s should be able to continue to grow its dividend. Currently offering good value, growth prospects and stability, Sainsbury’s trumps the best savings accounts by some distance and is a super stock for income investors.
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> Peter owns shares in J Sainsbury.