Searching the FTSE 100 for dividend stocks to buy can be a good idea as the British economy struggles. This is thanks to the index’s high concentration of companies that operate in overseas markets.
But not all FTSE-listed companies can be considered safe havens right now. Many UK blue-chip shares generate either all or a significant proportion of their earnings from these shores. Profits here could come under considerable pressure as growth-crushing interest rate rises come into effect.
To illustrate the point, chief UK economist Ruth Gregory of Capital Economics comments that:
By the end of quarter two, less than 40% of the drag [from interest rate rises] will have been felt and that more than 60% lies ahead. And we think interest rates need to rise further to quash inflation, from 4.50% now to a peak of 5.25%. That’s why we still think a recession is on its way in the second half of this year.
Two dividend stocks on my radar
Share pickers need to be especially careful when buying cyclical shares today, then. With this in mind here is one FTSE 100 dividend share I’d buy today and one I’d avoid.
BAE Systems
Dividend yield: 3%
In theory, earnings at defence companies like BAE Systems (LSE:BA.) should come under pressure as Britain’s economy struggles. In this sort of climate the amount of money government departments like the Ministry of Defence have to spend on weapons should decrease.
Yet the chilly geopolitical landscape means that spending here look set to keep rising. Indeed, in March it was announced an extra £5bn will be spent “to help replenish and bolster vital ammunition stocks, modernise the UK’s nuclear enterprise and fund the next phase of the AUKUS submarine programme”.
This bodes especially well for nuclear submarine maker BAE Systems. But it isn’t only benefitting from strong arms spending at home. Demand for its hardware from the US and the Middle East is also growing strongly.
I’d invest here even though contract timings can cause annual earnings (and thus dividend growth) to fluctuate.
Barclays
Dividend yield: 5.9%
I’m not so attracted to retail banks like Barclays (LSE:BARC), though. On the one hand, profits here stand to gain from further interest rises. Rate hikes allow lenders to make more profit by raising what they charge people and businesses to borrow.
Yet the scope for these banks to benefit from higher rates could diminish in the months and years ahead. For one, they are under increased pressure from MPs and consumer groups to offer higher rates to savers as the Bank of England increases its benchmark. Rising competition also means the pressure to offer better products is also growing.
And of course Barclays faces a steady rise in loan impairments as the cost-of-living crisis persists. The bank put aside more than half a billion pounds in the first quarter alone due to tough conditions in the US and UK. This was on top of the £1.2bn worth of charges it took in 2022.
