The FTSE 100’s performance at the start of 2023 has been highly impressive. Yet despite these gains many FTSE index shares continue to offer impressive dividend yields.
These three for example offer yields comfortably above the UK blue-chip average of 3.5%. But are they brilliant income stocks to buy, or simply investment traps?
J Sainsbury
Sainsbury’s (LSE:SBRY) shares seem to pack a real punch when it comes to dividends. As well as beating the Footsie’s average yield it also surpasses that of industry rival Tesco. The former carries a meaty 4.6% dividend yield compared to the latter’s 4.2%.
As a potential investor, I’m encouraged by the progress Sainsbury’s is making with its online operation. But troubles elsewhere make it too risky an investment, in my opinion.
The company is locked in a bloody price war that’s decimating its margins. Its underlying operating margin crumbled almost half a percent to 2.95% between April and September as price pressures and higher inflation weighed.
Intensifying competition both online and in-store mean that the profits-sapping price cutting will have to keep on coming too. This week, Aldi announced the creation of 6,000 new jobs in 2023 as part of its store expansion programme.
Barratt Developments
The share price of housebuilders like Barratt Developments (LSE:BDEV) have trekked steadily higher since the autumn. It suggests that investors believe the gloomy trading environment is more than baked into their valuations.
The danger isn’t over for them yet though. If inflation remains sticky, interest rates may have to remain higher for longer. This will keep homebuyer affordability under severe pressure.
But recent good news from Barratt suggests now is the time to consider adding to my holdings. It said earlier this month that “reservations have shown a modest uplift since the start of January”, thanks to an improving outlook for interest rates, energy prices, and a competitive mortgage market.
Today, Barratt shares carry a juicy 7.2% dividend yield. Poor dividend cover and an uncertain market outlook remain worries for me as an investor. However, if trading news continues to impress, I’ll look to buy more of this cheap FTSE 100 for my portfolio.
HSBC Holdings
I believe HSBC Holdings (LSE:HSBA) could be another great way to make passive income. The dividend yield here sits at an enormous 7.3% for 2023.
China’s ongoing fight against Covid-19 poses some danger in the near term. But over a longer time horizon I’m expecting earnings here to soar as demand for financial products soars across fast-growing Asia.
Standard Chartered’s bullish forecasts last week underlines the region’s exceptional potential. It predicted return on tangible equity to rise to 10% this year, from 8% in 2022. And the Asia-focussed bank raised its target from 10% to 11% for next year.
HSBC has the brand recognition and the scale to exploit this growing market to its fullest. And it is investing $6bn in key regional markets such as China and Hong Kong to give profits an extra lift. If I have cash to spare I’ll be seeking to buy the FTSE bank for my portfolio.
