Choosing the next dividend share to buy isn’t easy. Loads of FTSE 100 companies offer amazing yields right now.
I’ve been tempted by BT Group for ages. Its shares look incredibly cheap, trading at seven times earnings, while the 5.65% yield is covered 2.5 times earnings.
These stocks are cheap for a reason
One thing that holds me back is that I struggle to get a handle on the company. It’s got so many divisions, and troubles in one operation invariably cancel out progress elsewhere. Plus its hefty capital expenditure is squeezing cash flows, while revenues keep sliding, from £23.4bn in 2019 to £20.7bn in 2023.
BT shares have had a desperate 21st century, falling 85% since the start of the millennium. As has another FTSE 100 telecoms stock, Vodafone Group. It peaked at 528p in March 2000, at the height of the dot-com boom. It bottomed out at around 127p in September 2002 and has gone nowhere since. Today, they’re on sale for less than 75p.
Vodafone looks cheap too, trading at 7.5 times earnings, but its 10.4% yield looks vulnerable. Its merger with CK Hutchison’s Three UK mobile network creates an even bigger, bulkier business and the benefits could take years to materialise.
BT and Vodafone shares are down 24.22% and 41.17% over the last 12 months. They look more like a value trap than a buying opportunity.
The FTSE 100 dividend share I’m keen to buy isn’t without risk either. In fact, it’s right on the front line of the mortgage crisis and a potential house price crash.
Shares in housebuilder Taylor Wimpey (LSE: TW) have fallen 12.53% over the last month. Over one year, they’re down 8.53%. The long-term trend isn’t much better, with the share price down 41.57% in five years. So what’s the attraction?
Things are likely to get worse for Taylor Wimpey before they get better. Markets now believe the Bank of England could drive today’s 4.5% base rate as high as 5.75% as it battles inflation. This will spell disaster for 2.5m homeowners whose fixed rates end in the next 18 months. They face average increases of around £3,000 a year, and many simply won’t be able to afford it.
Forced sellers will hit prices while higher borrowing costs will deter would-be buyers. Forecasters now predict a property crash of anything between 10% and 35%. That will hit sentiment, orders and sales prices at Taylor Wimpey and the other big housebuilders.
My moment is coming
A key attraction is that I understand the housing market much better than telecoms. Taylor Wimpey builds homes and sells them, simple as that. Also, I think the housing panic has been overdone. A surprise dip in inflation could change sentiment in a flash.
That could make Taylor Wimpey’s rock-bottom valuation of 5.8 times earnings look like an unmissable buying opportunity for a long-term investor like me. Its 8.3% forecast yield looks vulnerable, but future payouts would be more sustainable when the dust settles.
Taylor Wimpey is undoubtedly risky as the housing market heads for a reset after years of cheap mortgage rates. I’m not going to buy it today. But I think there’s a big opportunity this year when the rate cycle peaks. I don’t feel so optimistic about BT or Vodafone.
