Both of these FTSE 100 shares are very popular in tough times like this. The sectors they operate in tend to be more stable during economic downturns. So their profits, and thus their potential to pay dividends, remain largely in tact. At least that’s the theory.
However, I believe one of these UK blue-chip shares should be avoided like the plague. So which one would I buy for passive income today?
SSE
Electricity generators like SSE (LSE:SSE) are beautifully boring. Their defensive operations mean that growth is steady and strong over the long term. On the plus side, this solidity usually allows them to pay strong dividends year after year.
This FTSE 100 share potentially has a better chance to grow profits through the next decade than its peers too. This is thanks to its decision to prioritise investment in green energy and, more specifically, wind farms.
SSE’s ability to grow earnings could receive a boost too if Labour succeeds at next year’s general election. The current opposition party — which is leading heavily in the polls — has announced its intention to lift the ban on new onshore wind turbines and if gets into government. It also plans to axe planning barriers put up by local councils.
Generating electricity from natural sources can be highly unpredictable. When the wind doesn’t blow, earnings can suffer. This very issue has prompted SSE to issue a profit warnings in recent years.
But all things considered I think the company is a great dividend share to own. I’d be happy owning this stock regardless of which political party is in power. Its dividend yield sits at a healthy 3.5% for this financial year. I expect it to increase steadily over the next decade.
Tesco
During economic downturns the amount of money people have to spend naturally recedes. Yet the essential role that food retailers like Tesco (LSE:TSCO) play means sector profits tend to remain broadly stable.
That said, I wouldn’t invest a single pound of my cash in the FTSE 100 supermarket giant today. Mounting competition in the grocery industry means that margins here are getting hammered. And the problem is getting worse as value retailers Aldi and Lidl rapidly expand their store estates.
The rush among shoppers to get the best price possible is heating up as the cost-of-living crisis endures. But this threatens to damage profits at Tesco for a long time. Analyst Susannah Streeter of Hargreaves Lansdown comments that “shopping safaris where customers cherry pick the best prices from multiple stores looks set to stay the trend in the grocery market.”
The considerable pulling power of its Clubcard loyalty scheme will help it compete in this ultra-saturated marketplace. But the risks to Tesco are still too great to make it a wise investment, in my opinion.
So I’m happy to pass on the FTSE share’s large 4.3% dividend yield. I’d rather buy other UK shares as I hunt for passive income.
