There’s more to successful income investing than simply finding stocks with high dividends. Here’s why I’d avoid the following FTSE 100 income stocks at all costs.
Defying gravity?
The pull of big near-term dividends at NatWest (LSE: NWG) isn’t enough to tempt me in. The yield here sits at a healthy 5.1% for 2022.
I think a sharp share price correction could be imminent as Britain’s economy wavers. In fact, I believe NatWest’s share price is extra vulnerable given the impressive gains it’s made in late July. Then, the bank raised its full-year forecasts following “strong growth in lending and deposits” in the first half.
There are growing indications that UK banks could face a tsunami of bad loans as the cost-of-living crisis worsens. According to the Insolvency Service this week, there were 28,946 personal insolvencies in the second quarter. That was up 7% year-on-year.
Bad loans
In this landscape, NatWest and its peers face a steady rise in loan impairments. Lloyds and Barclays have already set aside £377m and £341m respectively to cover bad loans.
NatWest, by contrast, has said it expects loan charges to remain low. But any signs to the contrary could sink its share price again.
Rising interest rates are providing a big boost to NatWest’s bottom line. However, I believe the benefits of Bank of England action will eventually be offset by problems created by the deteriorating economy.
I’d prefer to own HSBC Holdings (dividend yield: 4.1%) or TBC Bank Group (dividend yield: 8.9%).
All banks face rising uncertainty as the global economy cools. But I’d rather own emerging-market-focused HSBC and TBC, which could deliver stronger long-term growth.
Another high dividend stock
BP’s (LSE: BP) latest set of financials was enough to stop traffic. Thanks to soaring crude prices, underlying profits at the oil stock soared to $8.45bn in the second quarter. This was the highest level for 14 years.
It’s possible that earnings could keep rocketing too, as concerns over oil supplies roll on. Indeed on Wednesday, Brent crude rose back above $100 per barrel as OPEC+ countries agreed to boost daily production by just 100,000 barrels a day. This was a third of what the market was expecting.
Green dangers
But despite the prospect of strong near-term oil prices I’m not tempted to buy BP shares. That’s even though the FTSE 100 oilie also boasts a 4.5% dividend yield today.
This is because I buy shares based with a long-term view in mind. And I think earnings at BP could steadily recede as the fight against climate change intensifies.
Energy consultancy Rystad Energy is one of several forecasters to slash their oil demand predictions recently. It now expects peak oil to take place in 2026, a full two years ahead of its prior forecast. I think more downgrades could be coming across the board too.
Other UK shares I’d rather own include: Greencoat UK Wind (dividend yield: 4.1%) and The Renewables Infrastructure Group (dividend yield: 4.9%).
Adverse weather patterns can cause temporary profits problems from renewable energy stocks. But over the long haul, stocks like Greencoat UK Wind and The Renewables Infrastructure Group could generate blockbuster earnings as demand for their clean energy increases.