These two FTSE 100 shares offer market-leading dividend yields. But which of them is the superior buy at this moment in time?
Lloyds Banking Group
British banks like Lloyds (LSE:LLOY) face considerable pressures in the near term. They’re seeing a steady uptick in credit impairments and poor loan growth as the UK economy cools. This firm booked a further £243m worth of bad loans in Q1.
Yet in spite of this, the FTSE company remains a popular pick with income investors. This is thanks to its market-beating 6.2% dividend yield for this year. It’s also because the company looks in great shape to meet current dividend forecasts.
Predicted payouts are covered 2.7 times over by anticipated earnings. Any reading above 2 times provides a wide margin of safety. Lloyds also has a healthy balance to help it fund large dividend payments (its CET1 capital ratio stood at a robust 14.1% as of March).
So there’s a good chance that Lloyds could meet current dividend forecasts for the current year. In fact payout estimates could be steadily upgraded if the Bank of England keeps hiking rates well into the second half.
Persimmon
I’ve actually been considering adding to my holdings in Persimmon (LSE:PSN) for some time. Its cheap share price is unchanged since the beginning of the year, meaning it continues to offer some of the biggest dividend yields out there. Should I finally pull the trigger?
The housebuilder currently carries a forward-looking dividend yield of 6.3%. This sails above the index average of 3.8%. It also beats the yield over at Lloyds.
However, I’m concerned about the level of dividend cover over here, at 1.4 times for this year. Given the fragile state of the housing market this leaves payout forecasts looking equally frail.
On the plus side, property website Zoopla says that new sales agreed have surged in the last four weeks as buyer confidence has improved. These are 11% higher than the five-year average.
But huge question marks linger over whether the homes market’s tentative recovery in 2023 can continue. As interest rates rise, the number of mortgage deals being pulled could surge as it did last autumn.
Product withdrawals are already heating up. Price comparison site Moneyfacts says the number of mortgage products has fallen to 5,012 from 5,385 over the past week. The number could keep climbing too as uncertainty over Bank of England rate policy persists.
The verdict
Right now I’m happy to sit on my hands rather than buy more Persimmon shares. But I’d still rather own the blue-chip housebuilder than Lloyds today.
A combination of weak supply and population growth means property prices should grow strongly again once current inflationary pressures subside. So I expect housebuilders like this to generate excellent profits.
I’m not convinced that Lloyds will perform as strongly. The UK economy faces significant structural issues that could dampen loan growth over the next decade. The business could also struggle to increase earnings as nimbler digital-led banks chip away at its market share.
I buy shares on account of what returns I can expect over the long term. On this basis I think Persimmon is a far better FTSE 100 share to own.
