With recessionary fears in the air, many of the current best FTSE 100 dividend stocks carry significant risks.
The best dividend stocks to buy now within the FTSE 100, in terms purely of the highest return, are comprised predominantly of housebuilders and miners, both of which offer unstable income dependent on the commodity and housing price cycles.
Best dividend stocks
The FTSE 100 dividend yield currently stands at 3.7%. 97 companies expect to pay out dividends in 2022, up from only 85 in 2020 during the days of the pandemic. And analysts believe a record £169.7 billion in dividend pay-outs could be achieved in 2022, with room for even higher returns in 2023.
Of course, the index is firefighting against multiple headwinds, including heightened geopolitical tensions, decades-high inflation, and the accompanying tightening monetary policy.
CPI inflation now sits at 9.4% and is expected to exceed 11% by October. The bank rate has already been hiked to 1.25%, and Bank of England governor Andrew Bailey has warned another 50-basis points rise is ‘on the table’ for August.
Meanwhile, BFY has warned annual energy bills could hit £3,850 in January, with winter monthly bills as high as £500. Simultaneously, political sparring between would-be leaders Rishi Sunak and Liz Truss is leading to ever more dire warnings from the Institute for Fiscal Studies that both politicians could send inflation even higher.
And the International Monetary Fund has warned that the UK will experience the lowest growth of G7 members in 2023. And as analysts globally sound the alarm bell over falling earnings, investors would be wise to choose stocks with strong defensive qualities.
While the below three are some of the best monthly dividend stocks, their high dividend yield could change at any time, especially given the volatility of their share price performance and complex revenue cases.
Best FTSE 100 dividend stocks
1) Persimmon (LON: PSN)
One of the UK’s largest housebuilders, this FTSE 100 stock currently pays out a dividend yield of 12.3%, making it one of very few to beat the current CPI inflation rate at 9.4%.
In July’s trading update CEO Dean Finch noted ‘we have further enhanced our build quality in the period while also driving build efficiency to historical highs and increasing housing gross margin.’ However, he accepted ‘the significant on-going challenges being faced by the industry. As we rebuild our outlet position, delays in the planning system, disruption in material supply chains and challenges in securing labour have impacted completions.’
In a sign of the turning market, the group only delivered 6,652 homes in H1, compared to 7,406 in the same half last year, while revenues fell to £1.69 billion from £1.84 billion. However, the average selling price rose by 4% to £245,600.
According to the ONS, the average UK house price now stands at a record £283,000, up 12.8%, or £32,000 over the past year. However, Persimmon shares are down 34% year-to-date, wiping out the dividend gains.
But the group thinks ‘demand across the UK remains strong,’ with healthy customer enquiries and low cancellation rates. Encouragingly, it’s also 75% forward sold for the full year, with the average selling price of new homes to owner occupiers up 12% to £280,700.
However, the wider cost-of-living crisis, exacerbated by rate rises and record energy bills, could easily dent Persimmon further in the long term, even if the current share price looks attractive.
2) Aviva (LON: AV)
Down 28% year-to-date, Aviva shares fell sharply after revealing Q1 results in May. Despite this, they remain a popular choice as a dividend share. Unlike the miners and housing stocks, insurance has a level of reliable returns that is usually less affected by economic downturns.
Moreover, it has a very healthy 7.3% dividend yield at present, nearly double the FTSE 100 average. However, despite the 40% hike this year, the pay-out has been cut multiple times over the past couple of decades.
And things could be looking up. CEO Amanda Blanc, who took over in 2020, has strategically repositioned the company, selling some international operations, repaying debt, and returning nearly £5 billion to shareholders.
Accordingly, Persimmon is forecasting a dividend of 33.4p in 2023, and 34.9p in 2024, compared to the current share price of just 398p.
One key risk includes the new laws aimed at preventing insurers from charging renewal customers more than new customers. So far, Aviva maintains the impact has been minimal, with few people switching and new customers simply paying more.
But with the cost-of-living crisis escalating, Aviva could run into problems. Strapped customers are more incentivised than ever to get the best deal, claim costs are increasing due to inflation, and an intensely competitive market means there is little room for manoeuvre. This could put the dividend security in jeopardy.
Moreover, activist investor Cevian has been building a stake in Aviva, making it the second largest investor after Blackrock. Contrarily to Blanc’s direction, Cevian co-founder argues the insurer has been ‘poorly managed for years,’ and ‘held back by high costs and a series of bad strategic decisions.’
Cevian is demanding better shareholder returns, encouragingly believing Aviva’s underlying value is in excess of 800p per share.
3) British American Tobacco (LON: BATS)
After falling steeply over the past five years, BATS has enjoyed a resurgence since October last year, when investors began to abandon growth stocks in favour of reliable dividends.
Up 17% year-to-date, CEO Jack Bowles told investors in half-year results that the FTSE 100 tobacco company is ‘well positioned to navigate the current turbulent environment due to our powerful brands, operational agility and continued strong cash generation.’
While tobacco use is falling globally, consumers do not typically give up nicotine in a downturn, making tobacco an effective inflationary hedge. And on top of previous rapid growth, its ‘new categories’ revenue increased by 45% to £1.2 billion in H1, with non-combustible product consumers up by 2.1 million to 20.4 million.
Overall, revenue rose by 3.7% to £12.8 billion. And for dividend investors, BATS is highly cash generative, converting profits to cash at an impressive 90%. Further, it has an ongoing £2 billion share buyback programme.
And while tobacco remains an ethically complex investing topic, Bowles previously called 2021 a pivotal year’ in getting consumers to switch to vaping.
Two key risks matter to the FTSE 100 dividend stock. First is the drive to crack down on vaping in the US, a key market.
Second is the risk that a strong market recovery will see newer investors taking money out of BATS to buy the dip in growth stocks. Of course, if the correction continues and inflation drives higher, BATS could see further investor interest.
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