These FTSE 100 income stocks both offer dividend yields far above the index average. Should I buy them today?
J Sainsbury
Price: 212p per share
Dividend yield: 5.9%
The J Sainsbury (LSE: SBRY) share price has slumped as fears over consumer spending have intensified. This has pushed its dividend yield well above normal levels. But I’m still reluctant to buy the FTSE 100 grocer today.
Food retail is traditionally viewed as an oasis of calm during tough conditions. However, the cost of living crisis in the UK is so severe that people are skipping and downsizing meals at a rate that should concern supermarkets like Sainsbury’s.
The Office for National Statistics reported on Friday that three-in-four UK adults feel “very” or “somewhat worried” about the rising cost of living. As a consequence, the number of households spending less on food and essentials has risen to 41%. This is up 5% from a poll held just a fortnight ago.
In this environment, Sainsbury’s will need to keep cutting prices to encourage people to keep shopping at its stores. The problem is that it has very little wiggle room on this front given the impact of rising costs on its already thin profit margins.
I like the excellent progress Sainsbury’s is making in the rapidly growing field of e-commerce. The grocer posted the best online sales growth of any UK supermarket during the pandemic. It is now the country’s second-largest online grocer and continues investing in its e-retail channel to keep the momentum going.
However, this isn’t enough to encourage me to buy Sainsbury’s shares today. I think the cost of living crisis and the increasing competition in the UK grocery industry make the company a risk too far today.
Rio Tinto
Price: £57.20 per share
Dividend yield: 12.2%
I’d be much happier to invest my hard-earned cash in Rio Tinto (LSE: RIO) right now. That’s even though commodities companies like this face an increased threat to profits as the global economy slows.
The FTSE 100 firm could see the prices of the raw materials it produces reverse sharply in the short-to-medium term. This in turn could hit profits hard and see dividends fall short of what City analysts currently expect.
Still, there’s a strong chance, in my opinion, that Rio Tinto’s dividend yield will still beat the broader Footsie average of 3.6% by a big margin. The company’s robust balance sheet certainly gives it scope to pay big dividends if it wishes. Rio Tinto had $1.6bn of net cash on its books as of December.
I think owning the mining business could be lucrative for me as commodities demand will likely soar over the next decade. Rising demand for consumer electronics, electric vehicles, and renewable energy technology for example looks set to turbocharge demand for its copper alone. I’d buy this dividend stock in the hope of making terrific long-term returns.