These FTSE 100 stocks offer dividend yields well above the index average. Which should I buy today?
Rio Tinto
I’ve already bought mega miner Rio Tinto (LSE:RIO) shares for my portfolio. And I’m tempted to increase my holdings as recent share price weakness has turbocharged the forward dividend yield. Right now this sits at 6.6%.
That said, I have to consider the possibility that the eventual shareholder payout could fall short of broker expectations. This is because key economic indicators suggest insipid commodities demand in the near term.
Latest Chinese growth data showed economic expansion of just 6.3% in the second quarter. This was a percentage point below forecasts, and followed weak export data last week.
Such news puts earnings, and by extension dividend predictions for Rio Tinto, under pressure. The dividend for this year is after all covered just 1.6 times by anticipated earnings. Any reading below 2 times should provide cause for concern.
However, I believe there’s a good chance dividends will beat the average for FTSE 100 shares. Let’s say that the company pays a dividend in line with that safety mark of 2 times. This would yield a market-beating 5.4% dividend yield.
I plan to hold my Rio Tinto shares for years. I’m confident it will pay big dividends for years to come as soaring demand for its copper, lithium and aluminium for instance drives profits. Rising investment in renewable energy, battery storage and electric vehicles should bolster consumption of these key metals.
BP
Of course, demand for other commodities may sink in 2023 as the economy cools. The outlook for oil prices is also highly uncertain in this environment. This in turn casts a shadow over BP (LSE:BP) and its profits forecasts for the near term.
Just last week the International Energy Agency (IEA) cut its oil demand estimates on what it called “persistent macroeconomic headwinds”. It now predicts annual consumption to rise by 2.2m barrels a day in 2023, down 220,000 from prior expectations.
China’s weak GDP print could prompt further downgrades from forecasters like the IEA too. But in better news, this is unlikely to affect BP’s ability to pay the dividends analysts are expecting for this year.
Dividend coverage stands at a terrific 3.7 times, providing a very wide margin of error. A strong balance sheet — as illustrated by its ongoing commitment to share buybacks — could also help the oil giant pay more market-beating dividends.
Current payout estimates leave BP shares with a 4.5% dividend yield. However, I’m not interested in buying BP shares for my portfolio. And it’s not just because the company’s share price could tumble as the year progresses.
Unlike Rio Tinto, which is well placed to exploit the decarbonisation trend, fossil fuel producers stand to lose out as renewables and alternative fuels steadily take over. And earlier this year BP reduced planned spending on green energy as it chases near-term profits by prioritising oil and gas investment.
As a long-term investor, I think BP shares could end up costing me a lot of money.
