These UK blue-chip shares both offer dividend yields that beat the 3.8% FTSE 100 average. So which — if any — should I buy for my Stocks and Shares ISA today?
Tesco
Online shopping continues to present a huge opportunity for Britain’s supermarkets. And Britain’s biggest retailer Tesco (LSE:TSCO) is investing heavily here to drive future earnings. In the last financial year alone it opened two new urban fulfilment centres.
Data compiled for the BBC by Kantar Worldpanel shows that 12% of all grocery spending is made online. That’s up around 50% from pre-pandemic levels. Technological innovation and changing consumer habits mean the delivery sector may have much further to grow as well.
Yet despite this, I’m not prepared to buy Tesco shares for my portfolio. E-commerce sales could disappoint in the near term as shoppers flock to discounters Aldi and Lidl for bargains. Sales could also underwhelm further out as competition heats up in the grocery sector.
The value chains are aggressively expanding to grab customers from established supermarkets. Aldi alone plans to spend £400m over the next year on new store openings and refurbishments to existing sites. Investment in online delivery is also heating up across the grocery sector.
US internet giant Amazon has also recently reinstated its commitment to grocery online and in-store. Chief executive Andy Jassy described the sector as a “big opportunity” back in February.
Tesco’s margins are sinking as it seeks to maintain its customer base. They fell to a threadbare 3.8% in the financial year to February. As market competition rises, it’s difficult to see how the business turns this around and becomes a solid profits generator again.
So I’d rather buy other UK dividend shares for my portfolio. Not even a market-beating 4.2% dividend yield is enough to tempt me to invest.
Taylor Wimpey
The tough economic climate poses significant near-term risks to housebuilders like Taylor Wimpey (LSE:TW) too. Rising interest rates also provide an added danger as they drive mortgage borrowing costs ever higher.
Yet I’d rather buy this FTSE 100 income share for my ISA than Tesco. The dividend yield here sits at a healthy 8% for 2023.
A stream of positive industry data suggests near-term conditions may be more robust than some fear. FTSE 250-quoted Crest Nicholson announced just yesterday that average sales a week improved to 0.54 in the six months to April, from 0.35 in November.
Encouragingly, it added: “Cancellation rates have continued to normalise and pricing has remained robust with minimal discounting or incentives being offered to achieve this outcome”.
The UK’s chronic housing shortage is helping to support profits at companies like this and Taylor Wimpey. It’s a phenomenon I expect to endure over the long term given weak homebuilding rates and growing property demand from an increasingly large population.
A sizeable supply/demand imbalance during the 2010s allowed housebuilders to generate huge profits and pay gigantic dividends. I expect earnings at these firms to recover strongly from next year as market conditions normalise.
