I think now is a great time to go shopping for FTSE 100 dividend shares. Britain’s premier share index might have enjoyed healthy gains since the start of the year. But plenty of top-quality blue-chips still carry brilliant dividend yields at current share prices. So I plan to go shopping!
A high-risk dividend stock
Tesco (LSE: TSCO) isn’t a FTSE 100 dividend share I plan to invest in however. Last week, the retailer said profits would likely fall this year as margin pressure increases. I think it could remain under great strain long into the future as well.
The bloody price wars being fought by Britain’s supermarkets are cranking up as they try to win over cash-strapped shoppers. In recent days, M&S upped the pressure by cutting prices of everyday staples in its Remarksable range.
More aggressive price slashing can be expected across the industry in the weeks and months ahead as grocers sacrifice margins to stop revenues crashing.
Is Tesco’s share price cheap enough?
I like Tesco because of its massive online business and its Clubcard loyalty scheme that has helped it defend its market share. But I still worry for it over the long term as budget chains Aldi and Lidl expand their store networks and its rivals invest heavily in e-commerce.
Tesco’s share price of 266p per share creates a decent 4.1% forward dividend yield. However, I don’t think its price-to-earnings (P/E) ratio of 12.1 times for this year reflects the colossal risks it faces.
A better FTSE 100 dividend share
I’d much rather invest my hard-earned cash in HSBC Holdings (LSE: HSBA). Like Tesco, this Footsie share also faces its share of risks. But at current prices, I think it’s much more attractive.
At 522p per share, HSBC’s share price commands an identical 4.1% dividend yield to Tesco’s. However, the bank’s P/E ratio of 10.2 times is far more appealing to me.
HSBC trades more expensively than UK-focussed FTSE 100 banks such as Lloyds and NatWest. I’d be happy to pay a premium for it though, given its excellent opportunities in fast-growing Asian nations.
A top emerging market stock
I’ve already bought Prudential shares because of its focus on these lucrative emerging markets. And I’m considering investing in HSBC following its plans to ratchet up investment in Asia.
As I mentioned, HSBC — like Tesco — also faces some not-insignificant risks to future profits. China’s rapidly-cooling property market presents a potentially major problem to the region’s lenders. Established operators like HSBC also face a battle to defend their market shares against rapidly growing digital-led operators.
Still, on balance, I think the potential long-term rewards of owning HSBC shares outweigh the risks. Besides, I think its ultra-low P/E ratio also takes into account the dangers facing this FTSE 100 dividend share.