2 sinking FTSE 100 dividend shares! Are they brilliant bargains or terrible traps?

I’m following Warren Buffett’s advice to “be greedy when others are fearful.” So should I increase my stakes in these FTSE 100 shares?

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The leading index of FTSE 100 shares continues to crumble as concerns over the geopolitical landscape rise. So I’m looking through my portfolio and building a list of bargains in which to increase my holdings following recent price weakness.

Builder in a bother

I’m not convinced about increasing my stake in Barratt Developments (LSE:BDEV) just yet, however. News from the housebuilding sector could continue to worsen as interest rates steadily rise.

FTSE 250 rival Vistry today (23 October) announced it would cut 200 jobs as it downgraded full-year earnings estimates. It declared a £40m hit to profits following price cuts to shift its homes.

This follows Barratt’s own admission last week that “the trading environment remains difficult.” It noted then that average weekly net private reservations were down 10% between 1 July and 8 October.

The long-term outlook for housebuilders like this remains robust. But I fear that earnings (and thus dividends) could disappoint severely over the next couple of years.

The fact that Barratt’s predicted dividend for this financial year (to June 2024) is covered just 1.7 times by expected earnings is a big red flag to me. Investing theory says that any reading below 2 times suggests a degree of danger that forecasts will miss.

So despite its excellent dividend history, and 4.3% forward dividend yield, I’d rather buy other beaten-down stocks.

A better FTSE 100 buy?

Drinks giant Diageo (LSE:DGE) is one such UK share of which I’m considering buying more. Its share price has ticked up more recently, but this FTSE 100 share has lost 15% of its value since 1 January.

This leaves the Smirnoff, Captain Morgan and Guinness owner trading on a forward price-to-earnings (P/E) ratio of 18.6 times. This is far below its historical average, which is in the early-to-mid 20s.

Fears over a lawsuit filed by rapper and former product collaborator Sean Combs has whacked Diageo’s share price. An unfavourable ruling could be a public relations nightmare for the company and result in large financial penalties.

Yet I believe this threat is more than reflected in the company’s current valuation. In fact I think it’s a great stock to buy for these uncertain times. The star power of its drinks means it should continue growing sales and profits even if inflationary and economic pressures persist.

Latest financials showed organic net sales up 6.5% between January and June, even as consumer spending remained under the cosh. Operating profit also rose (by 5.1%) as the business hiked prices to offset cost pressures.

Diageo shares have delivered a growing annual dividend for more than 30 years. City analysts are expecting payouts to continue growing in the year to June 2024 too, and for the following two years after that.

Encouragingly, this year’s predicted reward is covered twice over by forecast earnings as well. I think Diageo (whose yield sits at a healthy 2.7%) is a brilliant dip-buy at current prices. I already increased my stake in June, and plan to snap up some more shares when I next have spare cash to invest.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has positions in Barratt Developments Plc and Diageo Plc. The Motley Fool UK has recommended Diageo Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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