These FTSE 100 stocks offer dividend yields far above the index average of 37%. But are they brilliant buys for a passive income or simply investor traps?
Taylor Wimpey
Forward dividend yield: 8.2%
Housebuilders like Taylor Wimpey (LSE:TW) have been some of the FTSE 100’s best performers in recent hours. They’ve risen on news the government plans to scrap “nutrient neutrality” rules on new developments. The plans will cut costs and help builders ramp up construction of new homes.
But this is a rare piece of good news for these companies in what have proved turbulent times. In fact the profit and dividend forecasts of Taylor Wimpey and its peers remains under a dark cloud.
This week Zoopla predicted that UK home sales will topple to 1m this year. This would represent a 21% year-on-year fall, and the worst result for more than a decade.
There’s a strong chance too that conditions could remain tough beyond 2023 given how stubbornly high core inflation remains. The Bank of England says mortgage approvals dropped 10% between June and July as it continued hiking rates to control price rises.
These tough conditions are already creating carnage at Taylor Wimpey. Operating profit slumped 44.5% between January and June as completions tumbled more than a quarter, to 5,120 homes.
It’s important to point out that I own shares in this particular homebuilder. I bought them several years ago (and have held on to them) because the long-term outlook for new homes demand in the UK remains robust.
But right now I’d rather buy other FTSE 100 stocks for passive income. The fact that this year’s predicted dividend of 9.4p per share is higher than anticipated earnings of 9.2p leaves current payout forecasts looking especially shaky too.
Legal & General Group
Forward dividend yield: 9.3%
I’d much rather buy more shares in Legal and General Group (LSE:LGEN) to boost the passive income I receive.
Okay, dividend coverage here for 2023 also isn’t ideal. Expected dividends are covered just 1.1 times by predicted earnings, well below the widely-accepted security benchmark of 2 times.
But a rock-solid balance sheet means the financial services giant remains in good shape to meet cirrent dividend forecasts. Capital generation continues to exceed dividends. Furthermore, the company’s Solvency II capital ratio keeps improving and rose to 230% as of June.
It’s true that the company faces some uncertainty as the global economy splutters. Indeed, operating profits dropped 2% in the first half, thanks in large part to weaker profits from its investment management arm.
But over the long term I’m backing profits here to rise strongly. The need for retirement, wealth and pension products will increase as people live longer and the burden on citizens to fund their own retirements grows.
Legal and General also has excellent room for growth in overseas markets like the US, Canada and The Netherlands. Hargreaves Lansdown estimates that there are around $6trn of pensions liabilities across these nations, only a small percentage of which has been transferred to insurers.
