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The FTSE 100 is full of top dividend stocks right now but I can’t afford to buy every one that catches my eye. I’m keen on BP and Barclays, but there are two ahead of them on my shopping list today.
BP certainly tempts. The cash is rolling in and it’s forecast to yield 6.5% in the year ahead, covered an astonishing 4.1 times by earnings. Yet I’m wary about buying it right now, as its share price is still riding high at a time when the oil price is in danger of falling further.
So many shares to choose from
Barclays is another tempting dividend income stock with a forecast yield of 5.6%, covered 3.7 times earnings. It looks cheap too, trading at just five times earnings. So far it has also beaten off the banking crisis. Yet another favourite dividend stock of mine, housebuilder Taylor Wimpey (LSE: TW), has the edge.
I would already have bought this dirt cheap income stock, but for one thing. I have direct exposure to the property market via rival housebuilder Persimmon. If I could turn back time, I would have bought Taylor Wimpey instead.
In March, Persimmon slashed its dividend by 75%. By contrast, Taylor Wimpey has stuck by its shareholder payout. It looks affordable, with the current 7.6 yield covered exactly twice by earnings. Management has a policy of returning 7.5% of net assets each year to shareholders and seems keen to maintain that despite today’s many worries.
I’m not naive, I know the pressure the UK housing market is under right now. Taylor Wimpey has already warned that its order book is shrinking, and with the Bank of England set to hike interest rates again on Thursday, the pressure will build.
Income under pressure
Yet I’m crossing my fingers and hoping that these risks are reflected in today’s dirt cheap valuation of 6.6 times earnings. Since I expect to hold Taylor Wimpey shares for 10 years, and preferably longer, I should have time to overcome any short-term volatility in the property market.
I also rate power generator SSE (LSE: SSE). It has been one of the most generous dividend payers on the FTSE 100 for years, and retains that mantle today.
The forecast yield is now a meaty 5.1%, well above the FTSE 100 average of 3.5%, covered 1.5 times by earnings.
In marked contrast to BP, SSE is actively embracing the net zero energy shift towards renewables, rather than viewing it with trepidation. I’m hoping this will work in its favour in the long run. It’s certainly done the share price no harm lately, as it’s up 51.38% over three years. Over the last year, growth has slowed to just 3.02%.
The downside of SSE shares is that the company has to maintain hefty levels of capital expenditure to fund the green shift. As a result, it’s rebasing its dividend for a couple of years, which will hit my income stream in the short turn. The valuation is also a bit toppy at 19.49 times earnings.
Yet I have very little exposure to the renewable energy section, and SSE seems like a good way to get it. Others may prefer BP and Barclays, but Taylor Wimpey and SSE look just that bit more tempting to me.