One dirt-cheap 6% dividend yield from the FTSE 100 I’d buy for my ISA, and one I’d avoid

Could these cheap FTSE 100 dividend stocks be too good to be true? Royston Wild gives the lowdown.

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As a holder of Barratt Developments (LSE: BDEV) stock, I was first tempted to buy in on account of its market-mashing dividends.

The good news for all prospective buyers out there is that, despite the mighty share price gains that have followed the Conservatives’ thundering general election victory, the yield from this FTSE 100 stock still bashes the broader 4.8% forward average for Britain’s blue-chips. The readout sits at 6.4% for the fiscal year ending June 2020, whilst its corresponding P/E ratio of 10.2 times shows Barratt’s brilliant value from an earnings perspective as well.

The weak UK economy is likely to cast a shadow over the broader UK housing sector again in 2020. Halifax for one expects home values to rise between 1% and 3% next year, for example, as a result. But conditions look likely to remain strong enough for the housebuilders like Barratt to keep growing profits, the country’s homes shortage supporting sales of new-build properties and the business raising construction rates to capitalise on these solid trading conditions.

Barratt’s share price has risen almost 60% in 2019, and I expect another year of progress in 2020.

Shell fires warning shot

BP (LSE: BP) on the other hand isn’t a share which I’m tempted to touch with a bargepole today.

It’s not just that energy producers both large and small are likely to suffer from falling crude prices in an environment of slowing global growth. It’s that bubbly fossil fuel production from outside OPEC+ nations threatens to worsen the likely market surplus as well, hitting prices still further and causing further cutbacks across the sector.

The toughening trading environment for BP and its peers was highlighted perfectly in updated guidance from Royal Dutch Shell late last week. In it the London business said that it had decided to swallow some significant impairments for the fourth quarter “based on the macro outlook.”

These post-tax impairment charges will range between $1.7bn and $2.3bn for the quarter, it said, though it did not specify which assets these write-downs pertained to. In addition to this, Shell also marked down its sales forecasts for its oil products for the fourth quarter. At between 6.5m and 7m barrels per day, this is down from a prediction of between 6.65m and 7.05m made just a couple of months ago.

6.4% dividend yields? No thanks!

BP’s share price has enjoyed a mini rally in pre-Christmas trade but don’t let this fool you. The oil major’s share price has fallen 12% over the past six months as investor concerns over the global economy have risen.

And with economic data from across Asia and Europe worsening, a deterioration which owes a lot to a long-running (and still unresolved) trade dispute between the US and China, the omens don’t look good for the Footsie firm as we move into 2020. So forget about BP’s mega-low forward P/E ratio of 12.2 times and a bulging 6.4% dividend yield. In my view, the energy player simply carries far too much risk, a problem that is reflected by that rock-bottom rating.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild owns shares of Barratt Developments. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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