Legal and General, Persimmon, Lloyds, Rio Tinto, and Shell could constitute the five best FTSE 100 dividend shares to watch next month.
One of the most interesting dichotomies within the FTSE 100 — and particularly its hallmark dividend stocks — is that the index is simultaneously hailed as the benchmark for the UK’s economy, and yet according to FTSE Russell, index companies derive 82% of their revenue from overseas.
Indeed, only two of the five dividend stocks to consider for next month generate most of their income from the UK. This makes assessing what qualifies as the ‘best’ FTSE dividend shares something of an art.
For example, Persimmon and Lloyds are almost wholly dependent on the UK, and therefore factors including sticky domestic CPI inflation and rising interest rates are the key factors. For the other three, global concerns such as rising commodity prices, the Ukraine War, or US-China geopolitics are perhaps more important.
However, these five could represent a decent mix of FTSE 100 dividend shares spread across a mix of sectors and risk factors.
Best FTSE 100 dividend stocks to watch
1. Legal & General (LON: LGEN)
Legal & General has consistently remained a dividend favourite, and while past perfomance is no guarantee of future results, 2023 may be no different. Its share price has dropped by 5% year-to-date, leaving LGEN with an attractive dividend yield of 8.1%.
The FTSE 100 insurer boasts a strong balance sheet reflected by its a Solvency II coverage ratio of 240%. In FY22 results, LGEN saw operating profit rise by 12% to over £2.5 billion, with a return on equity of 20.7%.
Its reliable dividend is secured by its wide economic moat; the brand is well recognised and generally trusted by over 10 million customers in the competitive finance sector. Further, it sports a diversified business model, focusing on pensions, annuities, and equity release products, which provides solid growth opportunities as western populations age.
Most importantly, the company increased its full-year dividend by 5% to 19.37p in 2022, demonstrating a commitment to rewarding shareholders. Arguably, the recent share price decline presents a potential buying opportunity for investors, considering the attractive dividend yield and the company's strong financial position.
2. Persimmon (LON: PSN)
Persimmon shares have fallen by 45% over the past year, reflecting the challenging housing market amid rising rates, new restrictive landlord rules, and the withdrawal of key first time buyer incentives including Help to Buy.
However, the dividend yield now stands at a whopping 13.8%. While this may not be sustainable, this may prove too tempting for some investors to ignore, and especially those with a long-term mindset who are prepared to wait for the real estate cycle to return to positivity.
In FY22, revenue at the UK’s largest housebuilder reached £3.82 billion and pre-tax profits rose above £1 billion. Meanwhile, new build completions rose slightly to 14,868.
Nevertheless, with the base rate at 4.5% and rising, mortgage approvals are falling. According to Halifax, the cost of the average home was 1% lower in May 2023 than May 2022, the first year-on-year fall since December 2012. This means that preserving its dividend in 2023 may prove difficult.
3. Lloyds (LON: LLOY)
Unlike LGEN or PSN, Lloyds shares have continued to trade consistently within a range of approximately 40p-50p since April 2021, leaving some dividend investors to consider the FTSE 100 bank undervalued.
The bank reported solid Q1 results, with a headline statutory profit after tax of £1.6 billion, £500 million more than the same quarter last year. It also achieved a strong return on tangible equity of 19.1% and a 15% increase in net income to £4.7 billion, driven by the ongoing pandemic recovery and the tighter monetary environment.
The bank expects full-year net interest margins to average above 3.05%, but there are concerns about potential margin dips through Q2 as it will likely be forced to increase rates offered on its accounts to compete with rivals. However, the bank's CET1 ratio stands at a respectable 14.1%, and it anticipates a return on tangible equity of around 10% for the full year.
Further, Lloyds booked an impairment charge of just £243 million, suggesting optimism about the economic outlook. However, given the uncertain trajectory of the UK economy, this move may be premature.
But in the final analysis, it’s offering a solid 5.3% dividend yield.
4. Rio Tinto (LON: RIO)
Rio Tinto shares have declined by 12.3% year-to-date, leaving the FTSE 100 miner with an attractive 8% dividend yield. Despite a 36% decrease in net cash generated from operating activities last year, Rio Tinto remains committed to dividend investors having returned $8 billion for the year —or 60% of total underlying earnings.
The company's strategic investments in projects such as the Oyu Tolgoi copper-gold project in Mongolia and the Rincon Lithium Project in Argentina position it for long-term growth.
Of course, Rio Tinto's dividend performance is closely tied to global demand, and particularly for iron ore, which is heavily influenced by Chinese demand. Sluggish growth from that quarter could represent a risk, but this could be offset by growing demand for the miner’s copper as the green energy revolution accelerates amid a widening supply gap.
5. Shell (LON: SHEL)
Despite an exceptional revenue year in 2022, Shell shares have fallen by 3.8% year-to-date, leaving the FTSE 100 oil major with a 4.1% dividend yield and a potentially decent entry point given its price-to-earnings ratio of just 4.7. FY22 adjusted earnings rose to $39.9 billion in the year, driven by elevated oil prices caused by the Ukraine War and increased post-pandemic economic demand.
The company also recently announced a $4 billion share buyback program and increased its dividend pay-out by 15%. Like many other FTSE 100 dividend stocks, the major derives little income from the UK, leaving it little impacted by the current windfall tax.
However, weakening demand have seen OPEC introduce production cuts, historically suggesting that oil may be moving back to more normal pricing. For context, Brent was trading for as low as$72 at the end of May — just $1 above the 2021 average.
In Q1 2023, it again outperformed, delivering net profits of $9.6 billion, $500 million more than in Q1 2022, and $1.6 billion than its own advance estimate.