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Why I’d buy the Sainsbury’s share price for a FTSE 100 dividend starter portfolio

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In my view, a starter portfolio should be low maintenance and should help to build your confidence. It should provide respectable gains without requiring you to make complex decisions.

Today I’m looking at two FTSE 100 stocks I believe can meet these requirements. I expect both to deliver reliable dividends and steady long-term growth.

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The shape of things to come?

Last week’s news that Asda and J Sainsbury (LSE: SBRY) plan to merge caused Sainsbury’s share price to climb 15% in one day.

It looks as though chief executive Mike Coupe has been encouraged by the results of his acquisition of Argos. Combining the two businesses and moving Argos stores into supermarkets has already delivered cost savings of £87m. This figure is expected to rise to £160m by the end of the current financial year.

Mr Coupe seems confident he can achieve similar results by combining Asda and Sainsbury’s, while also cutting the prices of popular products by as much as 10%. This plan makes sense to me. These two supermarkets combined should have more buying power than Tesco. Management estimates of £500m in cost savings could be quite realistic too.

Why I’d buy

What was overlooked by many news reports was that Sainsbury also issued a pretty decent set of financial results last week. These were covered by my Foolish colleague Alan Oscroft.

Last year’s underlying operating margin of 2.4% shows just how competitive this firm is. But by operating on a larger scale, I believe businesses like Sainsbury’s should continue to generate attractive returns for shareholders.

The shares now trade on 14 times forecast earnings, with a dividend yield of 3.6%. I’d be happy to buy at this level.

A 5% yield I wouldn’t ignore

Oil, gas and mining stocks are often popular with private investors. And I certainly believe that a diversified portfolio should have some exposure to natural resources.

Unfortunately, many smaller resources companies fail to make money for anyone except their directors. Investing in these stocks needs specialist knowledge and is often very risky.

That’s why I prefer to invest in the commodity sector through larger firms with long dividend histories. This gives me confidence that management is committed to shareholder returns and that the company’s assets are actually profitable.

My top pick for new investors in this sector at the moment is BHP Billiton (LSE: BLT).

I like this firm for several reasons. It operates in four main sectors: oil and gas, copper, iron ore and coal. In each of these areas, the Anglo-Australian group owns big, profitable assets.

Like most miners, the firm cut its dividend during the 2015/16 mining downturn. But the payout was quickly restored as the market recovered. This year’s forecast dividend payout of $1.17 per share is only slightly lower than the peak of $1.29 per share seen in 2015.

How I’d invest

The mining market seems stable at the moment, and BHP is producing a lot of surplus cash. The shares currently trade on 12.5 times forecast earnings with a prospective yield of 5.6%. I believe further growth is possible and I’d rate it as a ‘buy’ at this level.

Of course, two stocks alone aren’t enough to create a diversified portfolio. I’d always suggest owning at least 10, ideally 15-20. If you’re still looking for dividend-growth stocks, then I’d urge you to consider these suggestions.

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Roland Head 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.

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