The Motley Fool

Why I’d dump dividend dud Tesco for this underrated income champion

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Cupcake styled as a unicorn
Image source: Getty Images.

Slowly but surely Tesco (LSE: TSCO) is making its comeback as a growing, profitable and healthy grocer after a few years of scandals, diminishing market share and falling profits. But while the company has resumed dividends, analysts are still only forecasting a 5p per share payout next year that at its current share price would mean an annual yield of only 2%, less than half the FTSE 100 average dividend yield.

While there is always room for the company’s earnings and dividends to provide a positive surprise, this meagre yield makes the company a dividend dud in my books. And on top of this, its growth prospects are still far from fantastic.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The main cause remains the German discounters Aldi and Lidl that have continued to take market share from the big four grocers at an astonishing pace. Over the past two years alone, they have increased their joint share from 9.6% of the UK grocery market to 12.6%. Over this same period, Tesco’s share has slipped from 28.4% to 27.6%.

Even if this trend slows down, the discounters will continue to place incredible pricing pressure on larger, higher-cost-base rivals like Tesco. This leads me to believe that its sales growth will remain low and margin pressures will continue, constraining its ability to provide bumper payouts to shareholders as it once did. 

Furthermore, at a valuation of 17.2 times forward earnings, Tesco is far from a bargain basement share. So with low dividends, continued competitive pressures and a rich valuation, I’ll be looking elsewhere for my income stocks.

A true dividend champion 

And one that I’d buy is warehouse REIT Tritax Big Box (LSE: BBOX). It owns large warehouses that are generally over 300,000 square feet in size and are located in prime spots near big cities and vital transport links.

Demand for these sorts of facilities has been off the charts in recent years as the normal needs of traditional retailers, including Tesco, have been supplemented by e-commerce firms needing the same sort of facilities to aid quick delivery to customers. For Tritax this means 100% of its properties are let on leases with a weighted average length of 13.9 years, on rental terms very favourable to the company.

In 2017 this, and the addition of new properties, led to the group’s rental income rising 26.2% to £125.95m, which alongside rising property valuations led the company’s net asset value to rise a full 10.3% during the year. Healthy rent rolls allowed management to pay out 6.4p per share in dividends for a yield of 4.32% at today’s share price.

And looking ahead, I see plenty of room for management to continue increasing dividends as demand growth for such warehouses remains well above supply growth, the e-commerce boom seems highly unlikely to slow any time soon, and Tritax is growing its portfolio by snapping up new facilities that generate more rents to fund more dividends.

The group’s shares trade roughly 5.6% higher than their net asset value per share, but this slight premium looks like a price worth paying to me for such a dividend dynamo.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.