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These FTSE 100 dividend stocks yield 5.4% and 2.9%. Which would I buy for my ISA?

Since January 2019, the shares of Sainsbury’s (LSE: SBRY) have fallen by 33%.  The Asda takeover failure put extra pressure on the share price. The merger was supposed to be a coming together of UK’s second and third largest supermarket chains. It could help Sainsbury’s beat long-time rival Tesco (LSE: TSCO). Although the share price is down, I am happy to avoid Sainsbury’s, despite its 5.4% yield.

Deep losses and stiff competition

The grocer announced a savings programme in September of £500m over the next five years. It includes closing some supermarkets and opening convenience stores. This programme did not go down well on the balance sheet of the company. The pre-tax profit saw a decline from £107m to £9m in the three months to September, due to a write-down of the property portfolio. There was a significant drop in profits, which is a red flag for investors. Like for like sales dipped 1% and revenue remained flat at £15.09bn. Total operating expenses increased and it has not led to a similar increase in revenues. The company cited high marketing costs, bad weather and reorganising costs as a reason for the decline.

Looking at the balance sheet, there are several bracketed numbers. The margin remains tight and revenues are not bringing in profits. Revenues of £16.9bn have only generated profits of £238m. Earnings per share has significantly declined from 0.19 last year to 0.13 this year.  It has consistently fallen over the last four years. The company has a current ratio below 1, which shows that debt repayment could be a big issue in the long run. A 3% increase in the divided does not justify the risk associated with an investment in the company, in my opinion.

The company faces stiff competition from Aldi, Tesco, and Lidl. Consumers are now increasingly choosing to make their purchases online, which reduces the need for brick-and-mortar stores. The performance of the company has not been very encouraging and forecasts for the coming year do not look attractive.

I’d buy this instead

If you are looking for a stock with consistent dividend payout and strong fundamentals, then Tesco is a good bet. Given the increasing competition in the market, while many grocers have lost share, Tesco has maintained its market share and continues to remain one of the top players in the industry. Tesco has a market share of 27% and the stock is considered a defensive investment. Even during a recession, people are not going to stop buying groceries and Tesco has more than 6,800 stores.

Its profit before tax increased by 6.7% and net debt was down by 7.8%. This  shows it is sustainable for Tesco to pay consistent dividends. I prefer the stock not only for the value for money but also because it offers security and low risk. The company expects an earnings growth between 5% to 10% in the coming period. Tesco paid 50% of the profits in the form of dividend and the company announced a divided 59% higher than the previous year. Tesco is likely to be bigger than what it already is today. The stock is fairly priced and has immense space to grow.

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Vandita does now own shares in any company 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.