In addition to announcing that it would be merging with Booker, last week Tesco (LSE: TSCO)also revealed that it would resume paying dividends from next year. Theresumption of bi-annual payoutsis good news for shareholders on two counts.
First, study after study hasshownthat continually receiving and reinvesting dividends is an excellent (if rather unexciting) way of growing wealth over the long term. Although the reinstated payments may be initially modest, every little helps.
Second, the return of its bi-annual payouts suggests that Tescos finances are now in considerably better shape than three years ago a state of affairs that will likely make its stock more attractive to investors. So, in addition to receiving dividends, holderscould enjoy a sustained risein the companys share price.The fact that Tescos shares shot up a full 10% last Friday rather than down (which is the more traditional reaction when an acquisition is announced) suggests market sentiment towards the UKs biggest retailer has returned in spades.
To be sure, Tescos not completely out of the woods yet. Only last Tuesday, it was reported that the company faces a fresh lawsuit from US investment house Manning and Napier over its accounting irregularities, in addition to the legal actioninstigated byinvestorsagainst Tesco last October. Moreover, the 16.9bn cap still faces intensecompetition in the grocery market from listed peers and the German budget supermarkets.
That said, Tesco looks to be in a far better position than it was a while back, particularly when compared tohigh-yielding FTSE 100 peers such asNext (LSE: NXT) and Vodafone (LSE: VOD)?So should those investing for income ditch the latter two and snap up the former?
Time to switch?
In sharp contrast to Tescos relatively buoyant last month, Nexthasbeen going through a torrid time. Claiming the title of biggest loser following Januarys flurry of retail updates, shares in the 5.7bn cap have continued their downward trajectory after estimatingthat annual profits would now be at the lower end of expectations. Given that inflation is expected to continue rising and the clothing market is more competitive than ever, I cant see the shares bouncing back in 2017.
Although times are hard, theres little doubt that Next remains a decentcompany, albeit one that has lost its way. A 4.7% yield is appropriate compensation while investors await a recovery. Most importantly, this is covered well over twice by earnings. As such, Im not sure that those investing for incomeshould movetheir capital over just yet.
Vodafone, on the other hand, seems to lurch from one crisisto the next. Followinglast weeks downgrade from Merrill Lynch, the shares now sit14% lower than this time last year. According to analysts, price wars in both the UK and India mean that the communications giant will report an operating loss in 2017 itsfirst in a decade.
With returns being unsustainably low, Vodafonemay soon be pushed into offloading some operations. Even if it chooses not to do this, any re-run of 2016s Brexit-induced anxietymay leaveits forecast earnings growth of 24% in 2018 looking wildlyoptimistic. While more will be revealed in next weeks trading update, I wouldnt begrudge investors for moving on.A cut to its 6% yield is certainlypossible, particularly as cover is still worryingly low.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.