2022 is almost over and it’s a been a good year for investors like me who love buying cheap dividend shares with sky-high yields. The FTSE 100 is jam-packed with dividend aristocrats. Deciding which to buy is like shooting fish in a barrel.
It looks like 2023 will be another good year for dividend shares, according to investment platform AJ Bell. It forecasts the index as a whole will yield a juicy 4.1% next year. That beats the majority of cash savings accounts with any share price growth and share buybacks on top of that.
I’m targeting dividend shares
However, I prefer to buy individual FTSE 100 stocks and by doing so I can get double that forecast 4.1% yield.
Housebuilder Taylor Wimpey (LSE: TW) currently yields 8.39% a year. That’s a stonking rate of passive income. Although as ever with high-yield stocks, there is a danger the payout may be unsustainable.
This company is operating in a tough sector as interest rates rise and analysts predict a house price crash. Rival Persimmon is in the process of cutting its dividend, and Taylor Wimpey could follow suit, but I’m not convinced it will.
The Persimmon yield almost hit 20%, making Taylor Wimpey’s look quite reasonable by comparison. Especially since it is covered a solid 2.1 times by earnings.
Last month, Taylor Wimpey reported a fall in sales and spike in cancellations, as the cost-of-living crisis hits demand. Things may get worse before they get better, but I suspect the UK’s housing shortage will prevent a severe crash. Especially since mortgage rates are not expected to rise as much as recently assumed.
Taylor Wimpey is forecast to deliver annual operating profits of around £922m and has a net cash position. That makes it a buy for long-term investors like me. Especially at today’s low valuation of 5.6 times earnings.
Several FTSE 100 stocks offer even higher income, including Aviva (8.4%), Vodafone (8.95%) and M&G (9.85%). I’m setting my sights even higher by opting for mining giant Rio Tinto (LSE: RIO), which yields a staggering 11.35%, the highest on the index.
I’d buy this FTSE 100 income stock too
That’s despite the fact that management halved the dividend in July, after earnings fell short of expectations. It is covered 1.6 times by earnings, which is reasonably solid and even if cut again, the yield should still be pretty high.
The Anglo-Australian miner has been hit by Covid lockdowns and property market worries in China. Those lockdowns have now been eased but now the world is waiting to see how rapidly Covid spreads without them.
The Rio Tinto share price has done surprisingly well this year, rising 15.82%. Over five years, it’s up almost 60%. Yet it still looks cheap, trading at just 5.38 times earnings. I actually bought the stock in October, and the share price around 15% up since then, so I’m happy.
At today’s valuation, I reckon Rio Tinto is still a buy for me as a long-term investor willing to see through today’s short-term challenges. Now roll on 2023 and let the income flow.
