Considering the volatile state of the stock market, FTSE 100 stocks have proven to be remarkably resilient. Over the last 12 months, the index is actually up by around 4%. And that number jumps closer to 8%, including dividends.
Dividends have often been the primary driving force behind the UK’s flagship index. After all, most of its constituents are industry titans generating chunky cashflows that often make up for the lack of growth. And some of these enterprises are currently offering record yields.
Two that have caught my attention are Vodafone (LSE:VOD) and Taylor Wimpey (LSE:TW.), offering 10.4% and 8.7% in respective shareholder payouts. Are these some of the best FTSE 100 stocks to buy now?
Investing in critical infrastructure
Vodafone is one of the biggest telecommunication companies in the world. And it’s no secret that the firm has been quite troubled for several years. Continuous value destruction in its core German operations (due to exceptionally high infrastructure costs) has left the balance sheet riddled with debt and shrinking cash flows.
Although the group has found success with its M-Pesa payments platform throughout Africa, its telecommunication strategy clearly wasn’t working. So it’s no surprise a new CEO has been brought in to try and right the ship.
Margherita Della Valle has been in the corner office since April. And there are some encouraging early signs of progress with new contracts established within Germany. Meanwhile, the group has just sold off its Spanish segment to Zegona Communications, raising some much-needed cash. And as part of the agreement, Vodafone will continue to provide services to Zegona, creating a new €110m annual revenue source.
That certainly sounds like promising progress for a firm offering a 10.4% yield. But I think this is, more likely than not, a trap. Keep in mind the group still has over €66bn of debt and equivalents on its balance sheet, making the threat of rising interest rates ginormous. Therefore, this FTSE 100 stock is staying on my watchlist for now.
Rebound in the housing market?
Vodafone isn’t the only enterprise affected by rising interest rates. Homebuilders like Taylor Wimpey have seen home-buying activity waiver in the face of higher mortgage costs. And looking at the latest results, double-digit declines in sales and profits are already materialising.
The housing market is notoriously cyclical. And while conditions are less than ideal right now, this will eventually change. After all, the population continues to grow and, with it, so does the need for additional housing. This long-term tailwind is particularly exciting for Taylor Wimpey. Why? Because the group has an enormous landbank.
Taylor Wimpey currently has an estimated £62bn of potential revenue in undeveloped assets within the UK. Developing these assets will easily take more than a decade. And the value will undoubtedly change during this time, based on economic conditions.
However, it goes to show that the group has plenty of under-the-surface value waiting to be unlocked. Pairing this with £740m of cash versus only £113 in loan obligations or equivalents makes for a healthy enterprise. At least, that’s what I think.
Continued short-term weakness in the housing market will likely play havoc with Taylor Wimpey’s share price. But in the long run, buying today, when the cycle is down, could achieve far superior returns when conditions eventually improve.
