These FTSE 100 dividend shares both offer yields above the index average. Are they brilliant bargains, or investor traps that I should avoid?
Home comforts
Demand for London properties is exploding in the post-pandemic landscape. According to estate agency Hamptons, a record 30% of all rental homes in the capital have been let to people previously living outside the city in the year to date.
The rising influx of people moving into London is buoying the sales market as well. Indeed, latest financials from Berkeley Group Holdings (LSE: BKG) showed that “the value of underlying sales reservations remaining slightly ahead of pre-pandemic levels”.
I expect the price tags Berkeley slaps on its new-build properties to continue rising as homebuyer demand — helped by historically-low interest rates and government support for first-time buyers — will likely continue to outstrip supply. Signs last week that the government is dropping its 300,000-homes-a-year target has boosted the outlook for home prices even further.
Today, Berkeley Group boasts an 5.8% dividend yield. It also trades on a low forward price-to-earnings (P/E) ratio of 10.2 times. I think this low valuation more than reflects the threat of rising building material and labour costs to the business. I’d buy.
Another top FTSE 100 bargain?
Oil major BP’s (LSE: BP) another FTSE 100 dividend share that looks dirt-cheap, on paper. The blue-chip stock boasts a 4.4% forward dividend yield at current prices. This beats the Footsie average of 3.6% by a big distance. On top of this, BP trades on a rock-bottom P/E ratio of just 5 times for 2022.
I believe though that this low rating reflects the massive risks BP faces as the world transitions towards green energy. The oilie itself is bulking up investment in renewables and is looking to have 50 GW of low-carbon power capacity by 2030.
Still, I worry about the huge costs BP is incurring to expand its green credentials. Its investment in renewables could significantly hit dividend payout levels in the medium-to-long term. And besides, BP will still generate the lion’s share of profits from oil at the end of the decade, an industry which is coming under increasing attack from legislators.
On the plus side, BP could deliver some handsome near-term returns if crude prices keep rising. Brent values, for instance, could well soar beyond recent multi-year highs of $130 per barrel if — as is looking increasingly likely — a protracted war in Ukraine pans out and oil supplies continue to be disrupted.
However, there’s also a good chance that oil could sink in the coming weeks and months as global growth slows. Last week, the International Energy Agency slashed its demand forecasts again, this time by 100,000 barrels a day, in a possible sign of things to come.
I believe the risks of investing in BP negate the appeal of its dirt-cheap share price for me.
