I’d buy 2,500 Sainsbury’s shares for £300 in annual passive income

Long-term investors in the Sainsbury’s Shares (LSE: SBRY) could feel the difference in supermarket returns this year after a difficult 2022.

The company’s share price has risen 15.5% since early January, meaning it is now down just 6% on a 12-month basis. In addition, dividend distributions that beat the index make it FTSE 100 Savings is an attractive option to earn passive income.

If I had money, this is how I would invest in a British grocery chain with an annual yield of £300.

Dividend investment

As I write, Sainsbury’s share price is at 260.10p. Today, the dividend yield on 1000000 shares is 4.66 %.

To target £300 in passive income per year, I need to buy 2,500 shares. That will cost me a total of £6,502.50. I can expect a little over £303 in dividends from my initial investment if I hold the shares for a year.

Some caution is needed here, as some City analysts expect the dividend to fall to 11.5p per share next year. They expect it will not rise above 12p per share in 2025.

Dividend forecasts are not always accurate, but it should be noted that yields may decline and distributions may be cut or suspended at any point.

If supermarket profits come under pressure as consumers tighten their purse strings in a cost-of-living crisis, shareholder payouts could be cut.

However, on today’s results, Sainsbury’s looks like a passive income generator to add to my stock market portfolio.

Sainsbury’s share price changes

I think there are several reasons to be positive in the growth prospects for Sainsbury’s share price.

The company’s recent Q3 trading update showed retail sales growth of 5.3%. Encouragingly, the business posted monthly sales growth in all key areas, namely: groceries (+5.6%), general merchandise (+4.6%), and clothing (+1.3%).

The grocery industry is notoriously competitive. In this regard, it is good to see Sainsbury’s outperforming its competitors on a number of metrics. Customer satisfaction is higher than in Tesco, Asda, and Morrisons. In addition, Sainsbury’s beat the trio in checkout speed and availability of colleagues.

Importantly, inflation in the company’s top 100 products is behind all of its major competitors. These include British brands, as well as discount chains Aldi and Lidl.

However, German challengers continue to enter the sector. In the four weeks to Christmas, both Lidl and Aldi secured a big increase in grocery volume, while Sainsbury’s was left treading water.

Competition remains a risk for Sainsbury’s shares, as it forces supermarkets to cut margins. So is the inflationary environment, which could continue to weigh on corporate profits. However, I have enough scale and brand strength to deal with a tough macro environment.

One interesting development is the latest news that Britain’s second largest grocer, Bestway, has built a 4.47% stake in the business. A takeover could lift Sainsbury’s share price higher this year, although this is only a speculative possibility at this stage.

Despite some risks, Sainsbury’s shares look cheap to me at the moment. If I had the money, the company would be on my shopping list to target a regular passive income stream.