To hell with these FTSE 100 dividend stocks and their 7%+ yields! I’d avoid them at all costs
Stock investors have been piling back into SSE(LSE: SSE) with some gusto in recent weeks, its share price having gained 7% in the past fortnight.
Quite an inexplicable little surge, in my opinion. As I noted in a recent piece about National Grid, investing in utilities at tense times like this can be a good idea. But I wouldn’t stretch this line of argument to cover SSE or its FTSE 100 peer Centrica (LSE: CNA), though, as the exodus of customers from their retail operations remains a major problem.
To underline this, data released this week from trade association Energy UK showed that 2018 was a record year for energy switchers, some 5.8m power customers — or to put that into context, one in five households — changing supplier during the year.
This was up 6% from 2017’s then-record 5.5m switches. What’s more, the data showed that the level of switching activity picked up as last year progressed, with 464,378 users changing provider in December, up 10% year-on-year.
Particularly worryingly for the so-called Big Six suppliers was that more than a fifth of all switches last month involved moving to a small- or medium-sized energy provider, illustrating the pull that those cheaper independent suppliers are having in hard times for British household budgets.
Things look set to remain difficult for some time yet, then. The increasingly-hostile chatter from consumer groups, regulators and politicians alike suggests that the price caps introduced in late 2018 may not be the end of the matter and that things could get much, much worse for the major suppliers’ future levels of profitability.
I’m not actually concerned by their relatively low valuations, Centrica carrying a forward P/E ratio of 11 times and SSE sporting a corresponding multiple of 14.9 times, nor am I interested in their prospective dividend yields of 9% and 7% respectively. The fact is, I wouldn’t touch either with a bargepole right now.
A better income stock?
Could Landsec (LSE: LAND) be a better bet for value and dividend investors?
In the current fiscal year, the commercial real estate investment trust is expected to record an 8% earnings rise, and this leaves it dealing on a cheap forward P/E ratio of 14.3 times. It also means that City analysts are forecasting another chunky increase in the annual dividend, leaving Landsec with a giant 5.6% dividend yield for the year.
But like Centrica and SSE, I’d be tempted to stay away from the Footsie firm today. The decelerating UK economy threatens to hammer demand for the company’s commercial property in the near-term, and possibly for much much longer if Brexit goes off with a destructive bang.
As JP Morgan commented this week when it downgraded Hammerson, rental growth is expected to deteriorate for European retail property owners in 2019. And in my opinion, the likes of Landsec should be braced for difficulties here, and for other critical parts of the domestic economy, this year and thereafter.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Landsec. 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.