The popularity of dividend stocks could increase in future. One reason for this is the rising rate of inflation. It now stands at 3% and means that it is becoming more difficult to obtain a real-terms income return. Since Brexit is edging closer and uncertainty appears to be building regarding a deal between the UK and EU, it would be unsurprising if inflation moved higher.
The company in question is J Sainsbury (LSE: SBRY). It has experienced a challenging period which has included significant pressure on UK consumers, as well as heightened competition from discount retailers. This has caused a decline in the company’s profitability, with its earnings having fallen in each of the last three years. They are also expected to drop in the current year by 8%.
However, the company’s outlook appears to be positive. The acquisition of Argos could help the business to grow, as well as create cross-selling opportunities. The synergies from the deal could be significant and may help the group to offset any decline in sales growth over the medium term. In fact, the company’s earnings are due to grow by 12% in the next financial year. This puts the stock on a price-to-earnings growth (PEG) ratio of just 0.9, which suggests that it offers excellent value for money.
With earnings expected to rise next year, Sainsbury’s may be able to afford a higher dividend. Shareholder payments are expected to rise by almost 10% in the next financial year. This puts the stock on a forward dividend yield of 4.6%. And with dividends set to be covered around twice by profit, there could be additional growth in shareholder payouts over the medium term.
Of course, there are other stocks which also have impressive income outlooks. For example, reporting on Friday was flooring specialist James Halstead (LSE: JHD). It stated that current trading is in line with its budgets, even though competitive headwinds have remained high. This represents a good performance at a time when margins have the potential to come under pressure. And with the company’s update stating that it is proposing a record dividend per share of 9.25p, it appears to offer significant income potential.
With James Halstead expecting to launch a number of new ranges and designs in 2018, it continues to be upbeat about its future outlook. With a dividend yield of 3% and dividends being covered 1.3 times by profit, its scope to deliver further growth in shareholder payouts seems high. Its earnings are due to rise by 4% in the current year and this could enable it to offer dividend growth which is above the rate of inflation. As such, now could be a good time to buy it alongside Sainsbury’s for the long run.
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Peter Stephens owns shares in Sainsbury's. 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.