I’ve been scouring the FTSE 100 for the best passive income stocks to buy. And these two income shares have grabbed my attention with their eye-popping dividend yields.
Should I buy them today?
Taylor Wimpey
Housing stocks like Taylor Wimpey (LSE:TW.) can be considered riskier buys than usual right now. House prices are retreating at their fastest pace for more than a decade as higher interest rates and tough economic conditions hit buyer demand.
Economist Daniel Mahoney at Handelsbanken has also suggested that “the correction in UK-wide house prices has got some way to go”. He referenced Bank of England data that showed mortgage approvals slumped 40% year on year in February.
Yet despite these difficulties, City analysts still think the housebuilders will pay big dividends in the short term. Take Taylor Wimpey as a prime example.
Okay, the full-year dividend is tipped to drop to 9.1p per share in 2023. That’s down from from 9.4p last year. However, this still results in a bumper 7.9% dividend yield.
Taylor Wimpey has a strong balance sheet that gives these forecasts strength too. Net cash rose to £863.8m as of December, thanks to its exceptional cash generation.
But worryingly, the forecast dividend for this year is poorly covered by predicted earnings (of 9.8p per share). This is a major concern, given the pace at which the housing market is deteriorating.
I own shares in Taylor Wimpey and I plan to hold on to them as the long-term outlook for UK property prices remains encouraging.
Demand for homes has long outstripped supply. This explains the explosive property price growth of recent decades. And data shows that housing policy remains insufficient to meet the needs of a growing population.
The Home Builders Federation has even predicted that “supply could halve and fall to the lowest level since World War Two”, due to current planning rules.
Aviva
However, I think there may be better ways to boost my passive income in 2023. And I believe Aviva (LSE:AV.) could be a choice for me today.
Like housebuilders, financial services businesses like this are sensitive to broader economic conditions. Demand for health and life insurance, investment and retirement products can fall as consumers feel the pinch.
Yet I believe Aviva will be in a stronger position to meet City dividend forecasts than Taylor Wimpey.
It is also a terrific cash generator, a quality which gives it a rock-solid balance sheet. The company’s Solvency II capital ratio stood at an impressive 212% at the end of 2022.
But dividend coverage is much stronger here than at the FTSE 100 builder. Predicted payouts are covered a sturdy 1.7 times by projected earnings. This is higher than Taylor Wimpey’s 1.1 times.
I’m also attracted to Aviva because of its superior 8.6% dividend yield for 2023.
I think profits and dividends here could balloon in the coming years. Trends like a growing elderly population and increasing worries over the State Pension should support rising demand for its financial products. If I have spare cash to invest I’ll buy Aviva shares for long-term passive income.
