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Is J Sainsbury plc A Super Income Stock?

As all Foolish investors know, all good things must come to an end.

Indeed, this was the case for J Sainsbury (LSE: SBRY) (NASDAQOTH: JSAIY.US) as it recently reported its first decline in like-for-like sales for over nine years. Like-for-like sales for the ten weeks to March 15 were down by 3.1% excluding fuel, which highlights just how challenging the UK supermarket sector is at the moment.

Shares fell on the news and are now down by 15% for the year. However, does this fall now make them more attractive as an income play? Is Sainsbury’s a super income stock?

A Great Yield

With a yield of 5.6%, Sainsbury’s certainly offers a great income at current price levels. That not only beats the FTSE 100 yield of 3.5%, but is also well-ahead of inflation and easily above the best rates offered by a typical high street bank account.

sainsbury'sFurthermore, Sainsbury’s adopts a relatively conservative policy when it comes to deciding the proportion of earnings that are to be paid out as a dividend. For instance, in the 2014 financial year, Sainsbury’s is expected to have paid out around 55% of net income as a dividend. This seems to be rather conservative and, with capital expenditure levels set to be lower in future years (as the company reduces its expansion into vast, out-of-town shopping centres), Sainsbury’s could afford to pay out a higher proportion of net profit as a dividend.

For instance, a dividend payout ratio of two-thirds could be the optimum level and would mean sufficient reinvestment in the business as well as an even higher yield for shareholders.

A Lack Of Growth?

Where Sainsbury’s disappoints is with regards to its dividend growth forecasts. For example, dividends per share are expected to fall by just over 2% in 2015, before increasing by 3.5% in 2016. This means that, while the company’s current yield is very impressive, it is forecast to remain at current levels (assuming a flat share price), which equates to a fall in real terms (when inflation is taken into account) over the next two years.

Looking Ahead

Trading on a price to earnings (P/E) ratio of just 9.7, Sainsbury’s is cheap — especially when compared to the FTSE 100’s P/E of around 13.5. Although dividends are expected to grow only marginally over the next two years, there is scope for an increased proportion of earnings to be paid out as a dividend. This, coupled with a great yield of 5.6%, means that Sainsbury’s is still a super income stock.

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Peter owns shares in J Sainsbury.