I’m searching for the best dividend stocks to buy for a healthy second income. Which of these FTSE 100 shares should I buy for my investment portfolio today?
Tesco
Profit margins at supermarkets like Tesco (LSE:TSCO) are taking an almighty whack. A combination of high cost inflation and heavy discounting means their ability to make money on sales is more diminished than usual.
It’s a problem that looks set to run as the discounting frenzy among Britain’s grocers heats up. In the past month alone, premium retailer Waitrose and mid-tier grocer Morrisons have both announced price reductions across hundreds of items.
The pressure on Tesco to keep cutting prices looks set to remain a long-term problem, too, as budget chains Aldi and Lidl rapidly expand their store estates and its rivals improve their online operations.
At the same time, worker shortages mean labour costs at the company might keep ballooning. Asda for instance announced on Friday plans to raise store workers’ hourly pay by 10% by July.
Tesco’s Clubcard incentive scheme may help it to retain customers better than expected. A steady flow of money-saving vouchers is a great incentive for shoppers to continue using the store.
But on balance I believe the risks of investing in the FTSE firm are too high. Not even a market-beating 4.2% dividend yield is enough to encourage me to invest.
Prudential
I’d be happier to spend any cash I have to build my stake in Prudential (LSE:PRU). Its focus on fast-growing Asia gives me a chance to make better returns than with many other FTSE 100 shares.
This week Standard Chartered predicted that China’s GDP will grow 5% over the next two years. Such bullish forecasts suggest companies with operations in the country and the surrounding region might generate superior profits than those that don’t.
A fresh surge in Chinese Covid-19 infections could scupper such predictions. In this scenario the return of economically devastating lockdowns might be a possibility. But so far news coming out of the country has been encouraging since pandemic rules loosened in December.
Besides, I’m prepared to accept a degree of risk in the near future if returns over the long term appear attractive. And the revenues outlook for Prudential is highly enticing in my opinion.
Analysts at GlobalData think China’s life insurance market will grow at an annualised rate of 5% to 7% between 2021 and 2026. Meanwhile, the industry in Hong Kong and Singapore is tipped to grow by 6.5% and 9.6% respectively.
Today Prudential carries an 1.5% dividend yield. This suggests that shareholder payouts from the insurance business aren’t the biggest. In fact this yield is far below the FTSE 100 forward average.
However, I think ‘The Pru’ could be a great investment for long-term passive income. The business is expected to raise the total dividend 10% year on year in 2023 by City analysts. And I’m expecting strong and sustained dividend growth in the years ahead as its Asian markets drive profits skywards.
