Christmas is coming and if I have money left over from my shopping, I’d love to spend it on more bargain dividend stocks for my portfolio.

Dividend stocks aren’t just for Christmas, of course. They’re for life. Any shares I buy today I’d hope to hold to retirement and beyond.

I’m on the hunt for dividend stocks

I’ve enjoyed some success from buying beaten-down FTSE 100 stocks lately, and I can’t get much more beaten than BT Group (LSE: BT.A). Its shares are down 35% over one year, and almost 60% over five years.

Falling earnings and rising debt never make a good combination, and BT has suffered both. It also has a £4bn shortfall on its pension scheme.

Management is looking to slash £500m costs as rising energy bills squeeze margins, with plans to merge its Global Services and Enterprise units. It faces a sea of troubles, yet I would still buy it. That’s because I’m a long-term investor, and can afford to look past today’s challenges. BT shares just look too cheap to ignore, trading at 5.5 times earnings. The dividend yield is a thumping 6.8%, covered 2.8 times by revenues.

When investor sentiment turns, positive, it must at some point next year, BT could rebound. I’d like to be holding its stock when it does. 

I’m applying the same philosophy to my second FTSE 100 dividend stock, Britain’s biggest fund manager Schroders (LSE: SDR). Its share price has been knocked back by this year’s volatility, crashing 25%. Measured over five years, Schroders shares are down 22% so it’s not a one-off.

As markets fell and investors backed off, assets under management (AUM) dipped 2.7% to £752.5bn in the quarter to 30 September. I don’t think that’s too bad, given the turbulence. I’ll be watching closely for the next set of numbers, as the current stock market rally should boost AUM for the quarter to 31 December.

FTSE gives me income

Yet the quarter also saw the gilt market meltdown, which sent assets in its Solutions division crashing more than £20bn to £205bn. Despite the uncertainties, Schroders’ shares are up 10% in a month. Next year could be even better and the stock looks good value at 9.15 times earnings while yielding 5.4%, covered twice.

While I’m in the mood for risk, I’d also consider the UK’s second-biggest grocery chain, Sainsbury’s (LSE: SBRY). Its shares have also suffered a meltdown, falling 20% in the last year, while trading 12% lower over five years.

Again, it’s been climbing in recent months, as investors believe the sell-off has been overdone and fancy a bargain. Sainsbury’s is certainly that, I feel, valued at just 8.8 times earnings.

There are signs that grocery inflation is easing although I’m not putting too much faith in that, as Kantar figures show, it was still a terrifying 14.6% in November. Sainsbury’s can’t easily push those costs onto cash-strapped customers.

Throw in the threat from Aldi and Lidl and things look even tougher. Yet I’d still buy Sainsbury’s for its 5.84% yield, covered 1.9 times by earnings. I’ll reinvest that to buy more stock and with luck, one day shoppers will feel richer and the Sainsbury’s share price will recover. As I said, I can bide my time.

The post I’d buy these 3 dividend stocks before Christmas appeared first on The Motley Fool UK.

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Harvey Jones doesn’t hold any of the shares mentioned in this article. The Motley Fool UK has recommended Schroders (Non-Voting) and Sainsbury’s. 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.

The FTSE 100 is packed with cheap shares at the moment, and I am now drawing up a shortlist of top opportunities. 

I have already taken a punt and bought FTSE 100 housebuilder Persimmon, which currently trades at just 4.9 times earnings and yields a ridiculous 19.41%. That dividend looks fragile, as it’s just too big now. But even if it was halved, I’d still get around 10% a year.

Next, I’m looking to buy Rolls-Royce. Its stock has fallen by 75% over the past five years, but I think it should outperform when the recovery comes. Again though, it’s at the risky end of the spectrum.

My target is cheap shares

Once I’ve completed the purchase, I will be gunning to buy more cheap shares. Grocery chain Sainsbury’s (LSE: SBRY) has caught my eye. The stock is really cheap, trading at just seven times earnings. Yet it’s another high-risk play and maybe I’m already taking more than enough chances with my money.

Shoppers are short of cash and looking to cut back whenever they can. In the past, this may have favoured supermarkets, which attract essential rather than discretionary spending. This isn’t the case today, given the squeeze. 

Cash-strapped shoppers are trading down on favourite brands, switching to discounters like Aldi and Lidl, or simply going without. 

Sainsbury’s is still the UK’s second biggest supermarket, with a market share of 14.7%. However, that is down from 16.6% a decade ago, according to analysts Kantar. Its market share was 14.9% a year ago, so the slide is ongoing.

The grocer will struggle to build its position with its most recent Q1 figures showing underlying sales falling 4%. General merchandise fared worse, unsurprisingly, down 11.2%.

Chief executive Simon Roberts has warned the pressure on household budgets “will only intensify” as inflation hits incomes (and that was before the current crisis). Yet the group still anticipates annual underlying pre-tax profit of £630m-£690m.

Sainsbury’s carries net debt of £6.759bn, which worries me. Management is clearly worried too, as it has been battling to pay it down, with some success. It recently hit its four-year target of reducing net debt by at least £950 million a year ahead of schedule.

I like the Sainsbury’s dividend policy

It did that while maintaining its a “broadly stable dividend”, paying out £1.1bn over five years. This year’s proposed full-year dividend per share of 13.1p is up 24%. That’s the highest since 2015 and will return another £300m of cash to shareholders.

Sainsbury’s currently yields a blockbuster 7.9% with the payout covered 1.9 times by earnings. Despite today’s troubles, the company currently generates the £500m a year in retail free cash flow that it needs to keep the payout affordable. I think this dividend looks more solid than many.

Roberts knows how important the dividend is, given the group’s slim growth prospects. The Sainsbury’s share price is down 38% over a year and 25% over five years. I don’t expect much in the way of share price growth for years, but that dividend swings this for me.

It is probably more solid than Persimmon’s, while Rolls-Royce pays nothing at the moment. I may take a chance and buy Sainsbury’s shares, once I have the cash.

The post I’m buying cheap shares today, but is this 8% yielder too risky? appeared first on The Motley Fool UK.

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Harvey Jones holds shares in Persimmon. The Motley Fool UK recommended Sainsbury (J). 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.

I have zeroed in on two shares for my portfolio. These are businesses that I think show growth potential and can generate cash even in tough economic conditions.

Grocer with sky-high dividends

At current levels, I think the Sainsbury (LSE:SBRY) share price is one of the best bargain options in the FTSE 100 right now. AT 209p, it is trading at a price-to-earnings ratio of 7.2 times and a lofty 6.2% yield.

Yes, the company has been in the news this week after last quarter’s sales dipped 4%. But this was in line with board expectations and the profit estimate for the year remains unchanged at between £630m and £690m. While this is lower than the 2021-22 profits of £730m, the company has a few plans up its sleeve. 

Given the rising raw material costs, the board will inject £500m over the next 24 months to keep product cost inflation at the minimum. I think this move will help the grocer gain footing on Tesco and grow its current 15% market share as inflation runs rampant.

Despite small margins, if profit estimates are met, the company expects to generate retail free cash flow of at least £500m in 2022-23, similar to last year’s £503m. I think the board will keep the payouts flat next year given tough economic conditions. But a healthy 5%+ yield looks likely, which I see as a positive.

However, the impact of inflation will hit this sector hard. Large grocers like Sainsbury will lose out to discount retailers, even if current prices are maintained. And this will inevitably eat away at Sainsbury’s revenue. 

But overall, this FTSE 100 firm looks well-set to navigate choppy waters. I am bullish on Sainsbury shares and will consider them for my portfolio in 2022  if signs of a market recovery become stronger. 

Alcohol heavyweight

Diageo (LSE:DGE) is a global alcohol aggregator that owns extremely popular brands like Smirnoff and Johnnie Walker. The FTSE 100 company has adopted an emerging market strategy, focusing on growing regions like India and China.

Down 14.8%, I think the Diageo share price is going through a rare lull given its steady rise over the last five years. And looking at the share price action over the last two decades, the company has been on an incredible upward trajectory. 

And I think this growth could continue given its fast expansion policy. Diageo recently purchased Vivanda, owner of a flavour matching technology. This will allow users to build a flavour profile and choose spirits based on suggestions. I think the company is adopting digital sales and shows a lot of growth potential.

Tough regulations and local competition will grow with expansion. And the company will have to deal with the rising tide of health-conscious youth who are choosing to go alcohol-free in record numbers. 

However, I think the company is well-placed to navigate this given its size, range, and future plans. This FTSE 100 share is not a bargain on paper at 3,525p, but I think the company offers a lot of value and growth. This is why I will wait for a drop in share price before investing.

The post 2 top FTSE 100 shares to buy before a new bull market appeared first on The Motley Fool UK.

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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Sainsbury (J). 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.

Last week, the Bank of England (BoE) hiked the UK’s interest rates to 1%. The central bank also forecast that the UK economy will contract later this year, as disposable income decreases. With uncertainty surrounding the future of the UK’s economy, here are two stocks I’m avoiding for my Stocks and Shares ISA, and one I’m planning on buying.

Losing interest

In theory, banks such as Lloyds (LSE: LLOY) usually stand to benefit from higher interest rates. This is because banks can charge more for loans. Moreover, the rapid increase in house prices has brought a healthy stream of revenue to Lloyds. Nonetheless, the Lloyds share price is down 10% this year.

I’m avoiding this stock as I’m worried the bank’s profit might take a considerable hit from lower borrowing numbers and a slew of potential bad debts. With the BoE set to continue increasing interest rates in the coming months, Lloyds’ best-case scenario seems unlikely to happen at this point. Why? Well, the bank rate could rise further, which would be a plus for the group. But the BoE predicts inflation to peak at 10% later this year, much higher than the 7.6% upper level Lloyds would like to see. And hoped-for house price growth of 5.3% is dubious, as Nationwide and Halifax predict a slowdown in the market.

Grocery wars

The other stock I’m avoiding is J Sainsbury (LSE: SBRY). Despite being the second largest supermarket in the UK, the orange grocer has been losing a substantial portion of its market share to Aldi and Lidl. Its most recent trading update provided a rather gloomy outlook as well. Management cited, “Significant external pressures and uncertainties, including higher operating cost inflation”. This sent its stock price lower to £2.27.

Prior to the current cost of living crisis, Sainsbury’s was already operating on slim profit margins (2.3%). Now with pressure to keep prices low in order to avoid losing more market share, the retailer could very well see its margins contracting. Ultimately, Sainsbury’s will have to perform a balancing act of maintaining margins and holding its market share. Having already such low margins, this is one stock I’m unwilling to gamble with.

An ETF to stock up on

But there’s a stock I believe can add value to my Stocks and Shares ISA. It’s an ETF — Vanguard’s S&P 500 UCITS ETF (LSE: VUSA). The ETF tracks the USA’s top 500 listed companies, and averages a return of approximately 10% per year. Research has shown that almost 80% of fund managers underperform Warren Buffett’s favourite index. Therefore, while I generally like to pick my own stocks, I’m unwilling to gamble on professional managers’ stock-picking to beat the market. Although the heavyweight index is almost 15% down this year, it has a solid record of recovering from crashes.

Even better, Vanguard’s fund has outperformed the S&P 500 by 10%. This is due to its ability to hedge against the British pound by using the strength of the US dollar. On that basis, I think this is the best stock I can invest in to generate meaningful returns over a long period.

The post 2 stocks to avoid and 1 to buy for my Stocks & Shares ISA in this bear market appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Lloyds Banking Group and Sainsbury (J). 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.

Takeover bids

The recent Morrisons takeover news has brought a new focus on the UK supermarket industry. US private equity firm CD&R were pitted against competitor Fortress in a bid to buy Morrisons. This helped drive the Morrisons share price to all-time high territory.

This has been good news for the wider industry, with Sainsbury and Tesco both seeing share price increases of 5% and 10% in the past month.

Is Sainsbury the next target?

The Sainsbury share price leaped 15% when markets opened on 23 August. This seemed to signal investors believed Sainsbury could be a viable acquisition opportunity.

Looking at the current value of Sainsbury shares I believe there is a case for this. Shares are currently sitting at 303p and trading off a price-to-sales (P/S) ratio of 0.24. Competitors Tesco and Morrisons trade off slightly higher P/S ratios of 0.34 and 0.40 respectively. Sainsbury’s shares seem to offer good value here, an appealing attribute for a theoretical acquirer.

Looking at market shares, Sainsbury holds 16% of the UK market. This is significantly below Tesco’s 27%, but also above Morrisons’ 10%. This places Sainsbury as the second-largest company in its market.

The enterprise value (EV) of Sainsbury is also encouraging for the acquisition case. EV is a measure of the market cap plus net debt. This is essentially a figure of how much you would need to pay to acquire the business. Sainsbury’s EV is currently $13bn, not far off of Morrisons’ £10bn. Tesco on the other hand currently boasts an EV of £31bn. With Fortress and CD&R having total assets under management of £35bn and £16bn, respectively, I couldn’t see either of them bidding for Tesco. This leaves Sainsbury as a much more viable choice.

Therefore, I think there is a case for the acquisition of Sainsbury. This would undoubtedly lead to an explosion of the Sainsbury share price.

Long-term outlook

The most recent results are likely to have helped the Sainsbury share price too. Total retail sales were up 7.3%, and digital sales up 102%, now combining to 42% of total orders. Online shopping has been amplified because of the pandemic, with many people now sticking to shopping online. The fact that this part of Sainsbury’s business is so strong gives me confidence for the future.

Overall, I think it is fair to say an acquisition is viable. This could lead to an increase in the Sainsbury share price. However, I don’t like to base my investments on theoretical events – I don’t want that risk for my portfolio. I still think Sainsbury could prove a good long-term investment, but I won’t be buying any shares today.

The post Is the Sainsbury share price about to explode? appeared first on The Motley Fool UK.

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Dylan Hood has no position in any shares mentioned above. The Motley Fool UK has recommended Morrisons. 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.

But this morning, J Sainsbury (LSE: SBRY) served up a healthy 8.2% rise in first-quarter sales, driven by pandemic stockpiling. Online sales doubled as housebound customers scrambled to book home delivery slots. 

Sainsbury’s reported a £500m “profit impact” from Covid-19 overall, with clothing sales down 26.7% and fuel down 56.1%, and staff safety measures adding to costs. However, this was broadly offset by business rates relief and stronger grocery sales.

The Sainsbury’s share price has dipped

Excitement today centred around Argos. Sales rose 10.7% as locked-down Britons snapped up laptops, computer games, baking equipment and home office furniture. Former CEO Mike Coupe’s acquisition looks to be paying off.

Yet after an early jump, the Sainsbury’s share price retreated and is down around 1.5% at time of writing. Investors clearly anticipated the jump in online grocery shopping. The challenge now is to hold on to its new shoppers, amid intense competition.

At the start of 2018, Sainsbury’s market share stood at 16.2%, according to Kantar Worldpanel. It has since slid to 14.9%. The decline is inexorable, even if growth rates at discounters Aldi and Lidl are slowing. Margins are tight and Tesco‘s decision to price-match Aldi could up the pressure on Sainsbury’s.

Investors would now like to see a bounce-back in general merchandise sales, as the lockdown is eased. This is still a strong start for new boss Simon Roberts, the worry now is that customers will feel squeezed if unemployment rises sharply after the furlough scheme ends.

Roberts was being cautious today, warning of the positive impact recent sunny weather has had on sales at the FTSE 100 company, which may not last. The long-term impact of Covid-19 on sales and costs is impossible to predict, although underlying profit is expected to be the same as last year.

The share price looks cheap, judged by conventional metrics. Right now, it trades at just 11.2 times forward earnings.

Top FTSE 100 dividend stock

There is no dividend, remember. This was suspended in April, even though rival Tesco has stood by its payout. Interestingly, recent Sainsbury’s share price performance has been marginally better. It is up 7.5% in the last month while Tesco is down 2%. I suspect investors are indulging in a bit of profit-taking today, because these are good results.

The dividend will return at some point. Right now, analysts are forecasting a yield of 4.8% in 2021, and 5.1% in 2022. That is the main reason to buy into the Sainsbury’s share price – for income. Share price growth has been non-existent for years.

At today’s low value, right now could still prove a good entry point for long-sighted income seekers.

There could be better options though.

The post Looking for a rising passive income in retirement? I’d check out the Sainsbury’s share price appeared first on The Motley Fool UK.

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Harvey Jones 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.

The Tesco (LSE: TSCO) share price has risen about 10% over the last month. This sounds impressive. However, the FTSE 100 index has jumped 9.9% over the same period. So, when put into context with the footsie, the supermarket’s shares no longer appear to be market-beating.

Looking further back over five years, it appears that the only time Tesco shares have outperformed the FTSE 100 is through the recent coronavirus period. This is no surprise. During this period, many companies have had to stop operating but our need for food doesn’t go away. So, it’s likely all grocers will benefit, at least in the short term.

But is Tesco worth buying for the longer term?

Tesco share price leaps 4% on dividend 

Of Tesco’s recent 10% price jump, 4% was due to news that the grocer will reward its shareholders by paying a dividend. Currently yielding around 2.91%, it’s attractive for some but almost half that of rival Sainsbury, now at 5.33%.  

The news of the dividend raised some eyebrows. Tesco has generated pre-tax profits of £1.3bn over the 12 month period leading up to February 2020. But CEO Dave Lewis defended the decision by highlighting the chain’s need for capital to finance hiring new staff and its growing supply and distribution activities.

Indeed, Tesco may have to pay an estimated £925m to keep customers happy. Such large amounts may begin to undermine recent share price performance in the long run. The next two months’ revenue figures could help to show whether Tesco’s March boom is sustainable. 

Tesco is said to be a leader in its field. Moreover, it’s had a good recovery under its new CEO since the accounting scandals and profit warnings of 2014. The company has made a name for itself with online shopping and has a well-established platform. However, its competitors are catching up and I’m struggling to see how the grocer will maintain its leading position. 

Morrisons is growing its market share 

One such rival is FTSE 100 grocer Morrisons (LSE: MRW).

Morrisons is very much the smallest of the big four grocers. Its share price has been disappointing but there are many reasons to be optimistic about the future. 

For starters, Morrisons is expanding. Recent agreements with McColls and Amazon are generating new customers. This is giving more competition to the bigger grocery chains, and in particular, Tesco Metro and Sainsburys Local. Amazon Prime customers can now stock up on Morrisons groceries for same-day delivery. I don’t think any other online food retailer offers this service.  

Morrisons profit margins are similar to its peers. However, some analysts believe the smaller supermarket to have a more efficient cost structure. This bodes well for the future as coronavirus-induced pressures on logistics will be expensive. It will also help having a stronger balance sheet and no notable pension deficit to fund.

At 3.69%, Morrison’s dividend yield is better than Tesco. The company has a history of well covered and growing dividends, making it attractive for income investors. And some analysts expect Morrisons business model to take off, growing its share price. This makes it a good choice for value investors too.    

As the FTSE 100 recovers from the stock market crash, it may leave the Tesco share price behind. But I think Morrisons is better placed to go with it.

The post Has the Tesco share price beaten the stock market crash? appeared first on The Motley Fool UK.

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Rachael FitzGerald-Finch holds shares in Morrisons. 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.

Different directions

Happily, that proved to be a good call, because Sainsbury’s (LSE: SBRY) has seen its share price fall by 27% in the last year, while Tesco (LSE: TSCO) has shot up in the opposite direction, climbing 20%.

Both started the year in a bad place, with the Sainsbury’s share price down 17% over five years, and Tesco down 30%, as they wilted under the Aldi and Lidl onslaught. I favoured Tesco because it boasted superior earnings growth, operating margins and return on capital employed. I have also been impressed by Dave Lewis’s energetic turnaround plan since joining Tesco in 2014, although I also admired Sainsbury’s boss Mike Coupe’s £1.4bn Argos acquisition, which appears to have paid off so far.

Going head to head

What I couldn’t know at the time was that the Competition & Markets Authority would block Coupe’s bid to merge Sainsbury’s with Asda, although I knew it was a risk, given that the new group would have a total market share of more than 30%. It was a step too far for Coupe, and Sainsbury’s is now searching for a replacement. So would I still favour Tesco over Sainsbury’s today?

Tesco is by far the bigger operation now, with a market-cap of around £24bn. I was surprised to see how far Sainsbury’s has shrunk, as it had now dipped below £5bn. Perhaps inevitably, given recent underperformance, Sainsbury’s is cheaper trading at 11.2 times forward earnings, but Tesco isn’t that much more expensive at 13.6 times.

Going for growth

The best reason for buying Sainsbury’s is the yield, which now stands at a forecast 4.8%, with cover of 1.8. Tesco is still in the process of restoring its dividend, so today’s 3.5% payout looks disappointing, although cover of 2.1 gives scope for further growth.

Operating margins of 2% at Sainsbury’s are lower than Tesco’s 3.2%. The difference in return on capital employed is cavernous by comparison, 3.2% at Sainsbury’s, against 13% at Tesco.

The earnings are the real clincher. Sainsbury’s is in a spiral, with earnings down in four of the last five years, and the negative trend forecast to continue this year and next. Tesco, by comparison, has delivered earnings per share growth of 65%, 82% and 12% over the last three consecutive years, and that looks set to continue, with analysts predicting 13%, 10% and 8% over the next three.

Same again, please

The Tesco share price has been given a further lift by its plans to offload operations in Malaysia and Thailand. Barring accidents, Lewis will move to fresh pastures next year bathed in glory following a successful turnaround operation.

Now some investors like to sell their winners, and that’s tempting here because, surely, Sainsbury’s is ready for a comeback? However, I still favour Tesco because it appears to boast the better bottom line. I’d buy it ahead of Sainsbury’s once again.

The post £1k to invest? I’d buy the Tesco share price ahead of Sainsbury’s appeared first on The Motley Fool UK.

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Harvey Jones 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.

A number of the index’s members are proving to be highly unpopular with investors at the present time. Although they may face an uncertain near-term outlook, they could deliver impressive income returns over the long run.

With that in mind, here are two FTSE 100 shares that could offer an impressive dividend investing outlook. As such, they may be worth buying right now.

Severn Trent

Water and wastewater services company Severn Trent (LSE: SVT) released a trading update on Wednesday which showed it’s on track to meet guidance for the full year. Progress is being made in areas such as energy self-generation, as well as improving the customer experience.

Although utility stocks have historically offered defensive investing appeal, regulatory and political risks have contributed to weak investor sentiment in recent months. Severn Trent, for example, has recorded a share price decline of around 20% in the last three years. This trend may continue in the near term, with an uncertain operating environment having the potential to weigh on its future prospects.

Despite this, the company could offer long-term income investing appeal. It has a 5% dividend yield, which is historically high for the stock. Having a solid track record of dividend growth, as well as a relatively attractive price-to-earnings (P/E) ratio of 14, it may provide inflation-beating income returns over the long run.

Sainsbury’s

Having declined by around 40% in the last year, Sainsbury’s (LSE: SBRY) now appears to offer a wide margin of safety. Clearly, the company has experienced an uncertain period. Its failure to merge with Asda seems to have significantly disappointed investors, while its strategy and management team have come under pressure from a range of investors in recent months.

However, the valuation of the stock could present an investment opportunity. Currently, it trades on a P/E ratio of just 9. This suggests investors may have priced in the risks faced by the business in what is a challenging wider retail sector. As well as weak consumer confidence and an increasing shift to e-commerce sales, Sainsbury’s also faces a high level of competition from no-frills operators such as Aldi and Lidl.

While these threats could hold back its share price in the near term, its long-term income prospects could be appealing. It currently yields 5.7% from a dividend that’s covered 1.9 times by net profit.

With net profit forecast to grow by 4% in the current year, it’s clearly not the fastest-growing stock in the FTSE 100. But, equally, its prospects may be more attractive than the stock market is currently pricing in. This could present a good buying opportunity for long-term investors.

The post Have £2,000 to invest in the FTSE 100? Here are 2 dividend shares I’d buy in an ISA today appeared first on The Motley Fool UK.

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Peter Stephens has no position in any of the shares mentioned. 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.

Some of the biggest dividend stocks offer even larger yields than that, which can really turbocharge your income. Here are two 5% yielders that caught my eye. I thought they might fit nicely in your Stocks and Shares ISA but on closer inspection, I’d approach with caution.

GlaxoSmithKline

Pharmaceuticals giant GlaxoSmithKline (LSE: GSK) is one of the most renowned FTSE 100 income stocks and that remains the case today. Its current forecast yield is 5.1%, with cover of 1.4. However, the Glaxo share price has underperformed horribly, and trades 3% lower than five years ago, whereas the index as a whole is up 12% over the same period.

Worse, the dividend has been frozen at 80p since 2015, and is expected to stay there for at least the next couple of years. Free cash flow fell by 50% to £165m in the three months to 31 March. Net debt of £22bn is another worry, although plans to spin off its consumer healthcare business in a £10bn joint venture with US rival Pfizer should reduce that.  

Glaxo has been hit by some blockbuster drugs going off patent, notably Advair, which has made up almost a quarter of revenues. Investing in R&D to strengthen its drugs pipeline has taken priority over rewarding shareholders, as management looks to get those revenues flowing again.

Pipeline panic

Glaxo has had some success on that front, recently reporting positive data for several potential new medicines in HIV and oncology, but it needs a lot more of this to fully convince.

CEO Emma Walmsley is pushing on with her turnaround plans and the company’s stock is yours for a relatively bargain price of just 14.3 times forecast earnings. This is low for Glaxo and Roland Head recently suggested that this might make a good entry point.

However, you are relying on Glaxo replenishing its pipelines and there are no guarantees on that score. The stock is riskier than I feel it should be.

Sainsbury’s

Investors in supermarket giant J Sainsbury (LSE: SBRY) have endured a dismal 12 months, its stock crashing 40% in that time. The grocery sector as a whole has struggled due to Brexit, squeezed incomes, Aldi and Lidl, but the Sainsbury’s share price has had by far the worst of it. Morrisons has fallen ‘only’ 18%, and Tesco just 5%.

Sainsbury’s was hit hard by the collapse of the Asda merger, which has offset the good news from its apparently successful takeover of Argos. This is forcing the group to focus on its core retail offering, and management is now looking to cut labour costs, boost buying terms and revamp its own label range to revive profits. 

Taking stock

I reckon Sainsbury’s has its work cut out as Brexit squeezes incomes and the German discounters continue to make strides. Debt is another concern. On the plus side, the 5.5% yield is tempting and looks solid with cover of 2.0.

Sainsbury’s stock also looks cheap trading at 11.2 times earnings. Earnings may pick up slightly going forward, and the share price might spike as investors finally decide it has been oversold. I can’t work up much enthusiasm for it though.

The post 2 FTSE 100 dividend stocks I’d avoid despite yielding more than 5% appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.