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Forget buy-to-let! Why I feel Sainsbury’s is a FTSE 100 dividend stock that could make your cash work harder

The income investing prospects of the FTSE 100 continue to be relatively appealing. It currently yields over 4%, which may make it a better option than a buy-to-let, given the tax changes being made to the latter.

Of course, it’s possible to generate a higher yield than 4% over the long run. One company which could do just that is J Sainsbury (LSE: SBRY). The supermarket giant’s growth strategy could lead to a higher dividend, which may make it relatively appealing at a time when a number of FTSE 100 and FTSE 250 stocks appear to be somewhat overvalued after a 10-year bull market.

High price

One company which could be overvalued at the present time is engineering and industrial software specialist Aveva (LSE: AVV). It released a trading update on Thursday that showed it has continued to perform well during the first half of its financial year. Its growth included the impact of good sales execution, with a number of contracts being brought forward into the first half, and some benefit of upfront revenue recognition delivered on multiyear rental contracts.

Encouragingly, the integration of the heritage Aveva and Schneider Electric industrial software business remains on track. Progress in implementing costs-saving initiatives has been made, with the financial benefits of the process set to be seen in the second half of the year.

Aveva is forecast to post a rise in earnings of 12% in the next financial year. While its performance is encouraging and its outlook is positive, it trades on a price-to-earnings (P/E) ratio of 39 and has a dividend yield of 1.8%. These figures suggest that although it may be making progress from a business perspective, it seems to lack investment appeal – especially from an income perspective.

Improving outlook

In contrast, the investment potential of Sainsbury’s continues to improve. Its acquisition of Asda could prove to be a gamechanger in the UK retail industry, providing synergies and cost benefits over the long run. At a time when the expansion of other retailers such as Lidl and Aldi is continuing apace, the merged entity may be able to enjoy wider margins, or more competitive pricing potential over the coming years.

With Sainsbury’s having a dividend yield of 3.5%, it’s not the highest-yielding share in the FTSE 100. However, it has the potential to raise dividends at a rapid rate. Dividends are currently covered almost twice by profit, which suggests that they could rise at a faster pace than the company’s bottom line without hurting its financial standing. And with the potentially positive impact of the Asda acquisition, as well as the cross-selling opportunities from Argos, the long-term investment prospects for the business appear to be sound.

Of course, UK consumer confidence remains weak, and could deteriorate further as Brexit progresses. But with what seems to be a strong growth outlook, the retailer could offer better dividend prospects than the FTSE 100 and a buy-to-let.

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Peter Stephens owns shares of Sainsbury (J). 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.