Persimmon, Vodafone, and Rio Tinto could be three of the best FTSE 100 stocks to buy next month for UK dividend investors.
What may be the best FTSE 100 dividend stocks has always been notoriously difficult to predict. However, forecasting the long-term outcomes for FTSE 100 dividend yields is now much harder than even prior historically high standards,
Fundamentally, a stock’s dividend yield is predicated on two things. First, consistent revenue, margins, and profits. And second, a consistent share price.
But it doesn’t take a stock market expert to work out that this hoped-for level of stability is unlikely to be enjoyed for the foreseeable future, given how the Truss-Kwarteng mini-budget created chaos in the UK’s financial markets.
Encouragingly, with newly appointed PM Rishi Sunak in charge, UK government bond yields have now fallen to below levels prior to the poor-fated mini-budget’s announcement. But the challenges are only just beginning.
FTSE 100: dividend risks
Sunak is yet to announce policies of his own, ominously stating only that the country is in a ‘profound economic crisis’ and that he remains ‘determined to fix’ the mistakes of his predecessor.
Given his corporation tax rise and now-scrapped National Insurance rise, it’s fair to say Sunak is prepared to increase taxes to fund the £40 billion black hole in public finances.
However, the UK is facing a long, severe recession. PMI data shows UK business activity contracted for the third month in a row in October and is at its lowest since January 2021. And RSM economist Thomas Pugh has already warned that Sunak’s pledge to restore fiscal responsibility could create a fresh wave of austerity which could deepen the upcoming recession.
Importantly, this is not a political point. Whoever resides at Downing Street is facing multiple dilemmas, including starved public services that cannot afford further cuts, despite overall taxation levels rising to their highest since the post-war years, and CPI inflation up at 10.1%.
Then there’s the question of how energy prices will be massaged post-April, crippling mortgage costs, and a Bank of England base rate that could well exceed 5% by mid-2023.
Add in the pandemic recovery, Ukraine War, and general supply chain shocks and labour shortages, and all FTSE 100 dividend income looks at risk in the medium term.
Indeed, many FTSE 100 companies which have historically paid out high dividends may instead choose to retain excess cash as debt becomes more expensive, especially if they consider a slowdown in their sector a reasonable proposition.
Of course, this doesn’t mean that excellent opportunities aren’t available; simply that the risks are correspondingly magnified.
Best FTSE 100 dividend stocks
1. Persimmon (LON: PSN)
Persimmon shares are down 55% year-to-date to 1,285p. However, this share price haircut may make one of the UK’s largest housebuilders undervalued, with its dividend yield now at a truly exceptional 18.3%.
For perspective, the FTSE 100 yields circa 4% per annum.
A cautious investor may wish to pound-cost-average into this FTSE 100 company. Despite the wider recessionary environment, UK house prices have always trended upwards over the longer term, and Rightmove data shows that asking prices for homes again rose in October, up 0.9% to a new record of £371,158.
However, the property portal has also warned that the impact of the current economic uncertainty could take time to filter through, with many buyers rushing to complete before their now ultra-competitive mortgage deals run out of time. RICS has already cautioned that 2023 could see the end of the current 13-year housing boom.
Indeed, Moneyfacts data show the number of low-deposit 95% mortgages on sale has fallen to just 137 today, compared to 353 on 1 December last year.
Of course, the stamp duty threshold increase, one of the few mini-budget policies to survive Chancellor Hunt’s cull, appears here to stay. It’s worth noting that Sunak’s stamp duty holiday has been a key contributor to the record house price rises enjoyed by homeowners since the pandemic began.
Further, while the FTSE 100 company delivered 6,652 homes in H1, down from 7,409 in H1 2021, it argues that ‘demand across the UK remains strong,’ and remains 75% forward sold for the full year.
2. Vodafone (LON: VOD)
Vodafone shares are down 14% year-to-date, and 54% over the past five years, to just 99p. Europe’s largest activist investor and previously top-ten shareholder, Cevian Capital, has slashed its stake in response to growing scepticism that Vodafone can improve its sluggish performance. But Cevian may have jumped too early, as a restructuring finally appears underway.
The FTSE 100 telecoms stock is considering selling up to half of its 82% stake in Vantage Towers before reporting half-year results next month. This could assuage debt fears in the medium term.
In addition, it’s in talks with CK Hutchison, the owner of Three UK, to combine British operations to create the largest player within the UK’s mobile phone sector. If regulatory objections can be overcome, this could provide a significant boost to Vodafone’s bottom line.
Then there’s the €7 billion ‘FibreCo’ joint venture with Altice to consider. Designed to challenge Deutsche Telecom for ‘fibre-to-the-home’ broadband network dominance, the service will soon be available to 7 million German homes.
Expecting regulatory approval, the tie-up could close within H1 2023. CEO Nick Read argues that ‘this partnership builds on Vodafone's significant next-generation network with Altice's industrial expertise and proven fibre-to-the-home construction capabilities.’
Of course, while Vodafone has significant debt, its adjusted cash flow rose to €5.4 billion last year, allowing for €2 billion of share buybacks. Accordingly, it could remain cash-generative enough to maintain its healthy 7.6% dividend yield.
3. Rio Tinto (LON: RIO)
Rio Tinto shares were above 6,000p as recently as June, but have since fallen to 4,735p today. With an 11.2% dividend yield, the ASX dual-listed miner is being hit by the same negative market forces as fellow ASX 200 stocks, BHP, and Fortescue Metals.
All three are globally significant producers of iron ore, and the iron price has been sliding since reaching sky-high prices earlier this year, as fears of a Chinese economic slowdown and a wider global recession spike.
The Rio Tinto Iron Ore operation in Pilbara includes 16 iron ore mines, four independent port terminals, and a 1,700km rail network. Most of the iron mined is converted to steel for use in Chinese manufacturing.
And ANZ economist Catherine Birch has warned that ‘sentiment remains fragile’ for the metal, and further that ‘infrastructure is now becoming the most likely sector through which demand for steel and iron ore can receive a boost, but its impact on demand is waning.’
In addition, the prices of the other key metals that Rio mines — including copper, aluminium, and zinc — have also come off their 2022 highs, with fears of further falls if the global economy slides into recession in 2023.
But despite the risks, a double-digit dividend in combination with an already corrected share price could make Rion Tinto shares a buy at its current price point.
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