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Tesco shares? I’d rather buy this FTSE 100 dividend stock

Tesco (TSCO) shares remain popular for UK investors. People often like to invest in what they understand, so it makes sense that Tesco is a favourite. But is it actually a good long-term pick? I’m not so sure.

Turnaround

Sure, Tesco shares have enjoyed a fantastic run this year. The share price is up around 25%, meaning it has outperformed the FTSE 100 by a wide margin. Full-year results looked pretty good too. Like-for-like sales for the year ending 23 February were up 2.9%, while group operating profit surged 34%. The company hiked its dividend by 92% as well, which was great news for shareholders. CEO Dave Lewis has certainly done a good job of turning the supermarket around.

However, looking ahead, I can’t help but think that the business environment for Tesco looks challenging. For example, Aldi and Lidl plan to open hundreds of new stores in the next few years, which could hamper Tesco’s growth strategy, particularly if the economy takes a turn for the worse and consumers seek out lower-cost products. Interestingly, Aldi just opened a new ‘local’ concept store in South London right near me (I’ve been in several times and it’s always busy) which suggests that the low-cost supermarket (named Grocer of the Year last year) has more tricks up its sleeve.

Additionally, Amazon is now attempting to gain market share through its AmazonFresh subsidiary, which enables you to buy a broad range of products at low prices and have them delivered directly to your door. Given this level of competition, I’m not so bullish on Tesco’s long-term prospects. The shares don’t look particularly expensive (trailing P/E 15.5, yield 2.4%), but they don’t jump out at me as a strong buy.

Major opportunity

One FTSE 100 dividend stock that I do think has bright prospects right now is wealth manager St. James’s Place (LSE: STJ). The group specialises in providing trusted face-to-face financial advice to individuals and businesses, and demand for its services is strong, driven by the complexity of today’s financial environment. According to CEO Andrew Croft, there remains both a growing market for trusted face-to-face advice in the UK as well as an “advice gap” and that represents a “major opportunity” for the group.

A recent trading update showed that the FTSE 100 wealth manager has solid momentum at the moment. In the first quarter of 2019, the group received gross inflows of £3.6bn, taking its total funds under management to a record £104bn, while the client retention rate was a high 95.9%, which suggests that clients are very happy with the company’s services.

Of course, there are risks to the investment case here too and one risk is the growing threat of ‘robo advice’. This is where people receive financial advice from digital wealth managers with minimal human intervention. However, while this will suit some people, many (particularly the older generation) still prefer face-to-face advice when it comes to money, so I don’t think the group’s services will become obsolete any time soon.

St. James’s Place has been a fantastic dividend stock in the past as the company has lifted its payout substantially in recent years and right now, the stock offers an attractive prospective yield of 4.3%. I think that high yield is a steal, so I’d pick STJ shares over Tesco shares despite the stock’s higher P/E ratio of 19.

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Edward Sheldon owns shares in St. James's Place. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon. 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.