2023 has started with somewhat of an optimistic note, for investors, traders and the general public alike.
European natural gas prices have fallen sharply as a result of unseasonably warm weather, meaning that energy bills could be lower than the present price guarantee by April, and almost certainly lower than the lofty £7,000+ predictions of just six months ago.
CPI inflation has fallen from 11.1% to 10.7%, and Bank of England Governor Andrew Bailey has told the Commons Treasury Committee that inflation could see a ‘rapid fall’ as energy costs subside. Further, he declared that the UK’s Truss-era mini-budget ‘risk premium’ has dissipated, though admitted there remains ‘something of a hangover effect’ when it comes to convincing ‘everybody that we’re back to where we were before.’
But some of the fundamentals have not changed. Despite surprise 0.1% GDP growth in November, analysts still expect the country to face a long recession. The base rate stands at 3.5% and is expected to slowly rise through H1. And the effect on mortgages and the wider housing market is expected to see significant real-terms house price falls through 2023 — though past predictions in this arena have not always been accurate.
And after a successful ballot of the National Education Union, teachers will soon be joining the increasingly long list of striking professionals demanding inflation-busting pay rises that the government remains keen to avoid. This is a complex policy area, because unaffordable rises — and this is the government line — will only serve to accelerate the inflation-wage spiral, and also send a further message of unreliability to the markets.
However, against this backdrop, the FTSE 100 is closing in on its 7,903.50-point May 2018 intraday record high. Of course, there are several reasons why the UK’s premier index is performing so admirably. Investors are eschewing high-risk growth companies in favour of the index’s defensive stocks, including the banks, oil majors, and miners. And as circa 82% of FTSE 100 companies’ revenue is derived from overseas, the index is benefitting from the relative weakness of sterling.
This varied economic backdrop all makes selecting the best FTSE 100 dividend stocks somewhat of a challenge.
Best FTSE 100 dividend stocks
1. Glencore ($GLEN)
Up 35% over the past year, Glencore shares nevertheless still boast a 4% dividend yield and an attractive price-to-equity ratio of just 5.7, less than half the FTSE 100 average.
The miner is diversified by both geography and metal type and could become one of the key beneficiaries of the proposed commodities supercycle. Indeed, Goldman Sachs predicts that commodities will rise by 43% in 2023, making them the best asset class in the year. Of course, Glencore is further advantaged by its market position as both trader and producer across its diversified portfolio of mining operations.
The bull case for iron and copper has been made time and time again; despite the predicted global recession, urbanisation, EVs, and the green energy transition will see demand for Glencore’s metals soar this year and beyond. Of course, global prices will also be dictated by wider macro events; whether demand falls if China reverts to lockdown cycles, or whether supply increases if the Ukraine War reaches a conclusion.
2. Legal & General ($LGEN)
Legal & General has long held a solid reputation as one of the most reliable FTSE 100 dividend stocks. The company has fallen by 13.5% over the past year, buy now boasts a tempting 9.5% dividend yield alongside a price-to-equity ratio of 7.6.
And with cumulative dividends expected to reach between £5.6 billion and £5.9 billion by 2024, the yield could rise even further. LGEN is also comparatively financially secure with a Solvency II capital ratio of between 225% and 230%.
In the long term, it’s worth bearing in mind LGEN’s fundamentals. The company has over 10 million customers and its strong brand recognition means it could grow market share even in the highly competitive world of finance, as aging populations in its key markets turn to pensions, annuities and equity release products.
Some investors may worry that LGEN could suffer a similar fate to Direct Line, but while the two operate in the same sector, LGEN operates a far more diversified business.
3. Vodafone ($VOD)
Vodafone shares have fallen by 23% over the past year and 59% over the past five, leaving the FTSE 100 stalwart with a sizeable 8.4% dividend yield. Headwinds have been hitting investors relentlessly; CEO Nick Read left last month, the company has a €67.5 billion debt mountain to overcome, and cost-cutting and lay-offs abound.
But February this could mark the low point for the telecoms company.
In H1 FY23, Vodafone saw revenue increase to €22.9 billion, driven by rising service revenue and equipment sales. Resultingly, operating profit rose by a solid 12% to €2.9 billion.
Profits growth was driven predominantly by huge progress in Africa, with 51 million customers using its M-PESA platform, with further millions now accessing VodaPay. The platforms allow Africans with mobile phones who lack bank accounts to access traditional financial services, many for the first time. However, growth in Europe has essentially flatlined, excluding in Turkey.
Positively, the company is considering a merger with Three, which would see UK operations hold a combined 27 million customers, giving Vodafone the scale to fully upgrade to 5G at lower cost per customer.
A new CEO to oversee the merger could see a share price rally.