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The following FTSE 100 dividend stocks offer yields above the index’s 3.7% forward average. But as a long-term investor, which should I buy and what should I avoid?
Lloyds Banking Group
High street bank Lloyds (LSE:LLOY) is one of the UK’s most popular dividend stocks. This is partly down to its large 6.6% dividend yield for 2023.
It’s also because products like current accounts, mortgages, and credit cards are essential for individuals to function in a modern society. This helps give the bank predictable cash flow and the means to pay dividends year after year.
But I wouldn’t touch Lloyds shares with a bargepole right now. One reason is that it faces a period of weak loan growth and soaring impairments as the British economy toils.
I’m especially concerned due to its position as the country’s biggest home loan provider. This leaves it vulnerable to a sharp rise in bad loans as interest rates rise. Alarmingly, latest Bank of England data showed the number of mortgage defaults soar 30% during quarter two.
The trouble for retail banks is that Britain’s economy could underperform over a prolonged period. And what’s more, the likes of Lloyds also face a struggle to grow income as the market becomes increasingly competitive.
Last year, challenger and specialist banks lent £35.5bn to small-and-medium-sized businesses, according to the British Business Bank. That was more than the UK’s five-largest lenders combined.
Today Lloyds’ share price trades on a forward price-to-earnings (P/E) ratio of 5.5 times. It’s a valuation that reflects the high levels of risk the bank poses to investors. Its shares have fallen 31% over the past five years, and I believe there’s a high chance they will keep sinking.
Mining giant Rio Tinto (LSE:RIO) is also vulnerable during these tough economic times. Poor global growth — worsened by interest rate hikes around the globe — creates a cloud over commodities demand.
Buying metals producers is somewhat risky at all points of the economic cycle. Disappointment at the exploration, mine development, and production stages can all be common. And they can have a significant impact on company earnings.
Yet I still believe Rio Tinto shares are a great buy right now. I believe profits here will rise strongly over the next decade as commodities demand takes off.
Rapid population growth, supply chain development, and the green energy transition are all tipped to drive metals demand through the roof. Increased urbanisation and technological advancements in many industries will also boost consumption.
The iron ore market — a sector in which Rio Tinto is a major player — is tipped to grow at an annualised rate of 2.7% between now and 2030. That’s according to Market Research Future.
A shortage of new mine supply means that the market could move into significant deficit over the period, too, pushing up prices. Large imbalances are expected in other important commodity markets including copper and lithium.
I don’t think the cheapness of Rio Tinto shares reflects this enormous long-term opportunity. Today it trades on a P/E ratio of just 9.2 times for 2023. With the miner also carrying a 6.4% dividend yield, I think it’s a top value stock to buy.