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This retail investment is hammering the Tesco share price. Here’s what you need to know

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Supermarket shares like Tesco (LSE: TSCO) have performed better than many during the Covid-19 crash. But while the FTSE 100 has slumped by 20% in 2020, and many stocks have fallen a lot further, the Tesco share price is still down 15%.

Tesco shares have fallen around 5% over the past month, which surprises me. I see Tesco as a good long-term investment whose worth has come to the fore in the current crisis. But there’s a retail-related stock that’s been a lot more buoyant, and it comes in the shape of Supermarket Income REIT (LSE: SUPR).

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It does exactly what its name suggests, “providing secure, inflation-protected, long income from grocery property in the UK.” The year that ended in June saw annualised passing rent grow by 49% to £28.7m. EPRA earnings soared by 70% to £16.8m, and the company boosted its total shareholder return from 8% to 11.6%.

NAV premium

The firm put its Net Asset Value at 101p per share, putting the shares on a slight premium at 108p at the time of writing. At the start of the pandemic, Supermarket Income shares dipped pretty much in line with the Tesco share price. But the price recovered quickly, and it’s flat all bar 0.5% for the year so far.

I think the modest premium to NAV represents good value for those seeking reliable long-term income. We’re looking at a steady yield of better than 5%. This year’s dividend was raised by 3.6% to 5.8p per share, around double last year’s rate of inflation.

Above-inflation dividends

For the year to June 2021, the trust has a target of 5.86p. That’s only a 1% rise, but it’s based on June 2020’s inflation rate, which stood at 0.6%. I see that as a nice balance of beating inflation, while thinking mostly about long-term income generation. And that’s something that investment trusts can do really well.

The Supermarket Income REIT does own a number of Tesco supermarkets, and I rate the two as complementary in an investment portfolio. I see the REIT as helping to even-out the shorter-term fluctuations seen at Tesco.

Though I see the Tesco share price as a relatively defensive investment, analysts are expecting a drop in earnings for the current year. The dividend is expected to fall back a bit too, though that’s after a strong year ended February 2020 when the supermarket provided a 4% yield.

Is the Tesco share price cheap?

I’m sure some investors have switched away from Tesco in recent months to pursue some of the better yields currently available. But I think that provides us with an opportunity to lock in higher future yields. Forecasts put the Tesco dividend at 9.25p per share for the 2021-22 year, and on the current share price that would yield 4.3%. On the pre-crash Tesco share price, the yield would be only 3.6%. That bit extra can make a very nice difference over the course of five, 10 or more years.

I’d buy Tesco for its long-term dividend potential. And I’d buy Supermarket Income REIT for a similar reason, but also for a bit more medium-term stability.

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Alan Oscroft 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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