I’m searching for the best FTSE 100 shares to buy for a healthy second income this year. Should I stock up on these popular dividend stocks?
Taylor Wimpey
Housebuilder Taylor Wimpey’s (LSE:TW.) crashing share price now offers one of the biggest dividend yields on the FTSE. At 9.2% for 2023, it sails past the index’s 3.8% forward average.
I already own shares in the construction company and I plan to cling onto them. A range of problems (including planning regulations and labour shortages) mean Britain’s chronic shortage of new homes appears to be here to stay. I expect this to support strong house prices over the long term.
But I won’t buy Taylor Wimpey shares for passive income this year. Crisis in the mortgage market means earnings and dividends at the company are in danger of missing broker forecasts.
Average UK home prices have tumbled 5.6% during the last six months, according to estate agent Knight Frank. With interest rates tipped to rise further and the country flirting with recession, homebuyer demand looks set to remain under pressure.
The business has a strong balance sheet that it could use to help meet the City’s dividend projections. It had net cash at £863.8m on its books as of December. But it may choose to follow the example of industry peers Persimmon and Barratt and preserve cash in a bid to ride out the storm.
Taylor Wimpey raised the full-year dividend to 9.4p per share in 2022 from 8.58p previously. But signs of a longer-than-expected downturn in more recent months could result in huge changes to the firm’s payout policy.
It’s also worth noting that the predicted full-year dividend of 9.2p per share outstrips anticipated earnings of 8.9p. I think a larger-than-expected dividend cut could be just around the corner.
National Grid
I believe National Grid (LSE:NG.), which yields 5.6% for this financial year (to March 2024), is a FTSE 100 stock in better shape to pay large dividends right now.
This is partly because electricity demand remains largely unchanged during good times and bad, allowing cash flows and earnings to remain stable. It is also because National Grid has a monopoly across its transmission and distribution businesses, so competitors aren’t there to chip away at its profits.
Okay, the company must spend heavily to keep critical infrastructure running. It spent a whopping £7.7bn last year on maintaining and expanding its asset base. This cash drain poses a persistent threat to future dividends.
Yet investing in any stock involves some degree of risk. And I believe the defensive nature of National Grid’s operations put it in great shape to meet current dividend forecasts.
I also believe the firm’s plan to decarbonise the electricity system and embrace green energy could really boost earnings and dividend growth over the longer term.
This is a top income stock to buy for passive income, in my opinion.
