I’m searching the FTSE 100 for the best high-dividend shares for next year. Here are two whose market-beating yields have caught my eye.
All-round value
Fossil fuel stocks like BP (LSE: BP) are among the most cyclical out there. Yet the share prices of oil majors like this have risen in 2022 despite the worsening economic outlook.
Concerns over oil supplies following Russia’s invasion of Ukraine have supercharged energy firms’ profits this year. They could remain strong too if the conflict runs on and the OPEC+ group of oil producers continues constraining production.
Today, BP shares trade on a forward price-to-earnings (P/E) ratio of 5.2 times for next year. They also sport a healthy 4.4% dividend yield. But despite these attractive readings I’m not buying today.
Falling oil prices
This is because demand for oil is in danger of sinking as the global economy cools. Last week OPEC countries again cut their crude consumption forecasts for the next two years. They cited “the extension of China’s zero-Covid-19 restrictions and some economic challenges in OECD Europe”.
OPEC reduced its 2022 and 2023 demand forecasts by 100,000 barrels per day each. A steady flow of disappointing economic data suggests more downside risk to these new estimates too.
At the same time, it’s possible that the supply constraints that have boosted crude prices this year might not endure. In this environment oil inventories in OECD countries (which last week fell to their lowest since 2004) could rapidly refill.
As a long-term investor, I’m also nervy about buying BP shares. The business has very limited exposure to renewable energy sources and alternative fuels like hydrogen. It could therefore witness a rapidly-growing hole in its profits column as the world moves away from fossil fuels.
A better FTSE 100 buy?
Housebuilding titan Taylor Wimpey (LSE: TW) is a dividend stock I’d much rather buy today. In fact, I already own this FTSE 100 business in my Stocks and Shares ISA.
On paper, Taylor Wimpey’s share price also offers up a better dividend yield of 8.9% for 2023. It also trades on a low P/E ratio of 7.9 times for next year.
This is one of a few FTSE index homebuilders I currently own. I bought them for their ability to deliver more big profits (and to pay further market-beating dividends) over the next decade, perhaps even longer.
I believe house prices will rise strongly over the long term. Continued inaction at government level to boost housebuilding means Britain’s chronic housing shortage looks set to last. At the same time, steady population growth should keep boosting demand for new houses.
However…
Having said that, I don’t plan to add more housebuilding shares to my portfolio just now. This is because the homes market is currently cooling at an alarming rate.
Latest Rightmove data showed average home prices reverse 1.1% in November. This was due in large part to a shocking 26% decline in first-time buyer demand. And things could remain difficult over the short to medium term as the UK economy struggles.
All this means that earnings and dividends at Taylor Wimpey could come under significant pressure in 2023. So, right now, I’d rather buy other income stocks to boost my passive income next year.
