I’m looking to add another FTSE 100 dividend stock to my portfolio and both Barclays and Tesco are on my watchlist, but I’m not going to buy them right now.
I’ve got nothing against either stock. Both look cheap, trading at 5.1 times and 11.9 times earnings respectively, while yielding 4.58% and 4.14%.
They’ve struggled lately, with the Barclays share price falling 7.68% over the last year, and the Tesco share price up a meagre 1%.
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The underlying businesses look solid with Barclays recently posting a 16% jump in pre-tax profits to £2.6bn, and Tesco pushing through a £750 share buyback despite pre-tax profits halving to £1bn.
I’m not buying one of these two
If I had to buy one it would be Barclays. The grocery market is a little too tough for my liking, and margins are wafer-thin.
Yet both stocks are now lower down my shopping list than Rio Tinto (LSE: RIO). I took a small position in the mining giant last October, when it was yielding almost 12% a year. I was tempted by its massive dividend but also wary of it. Once dividends hit double digits, they’re highly vulnerable.
I didn’t invest that much and it was possibly a wise move, because management halved the dividend in February. There were few complaints, as it was high by historic standards, but the share price has trailed downwards since.
The Rio Tinto share price has fallen 11.73% over the last six months, and is down 14.34% over 12 months. That’s a notably worse one-year performance than Barclays or Tesco, which to an inveterate bargain seeker like me, is a recommendation.
Rio Tinto’s dividend tends to be up-and-down as does the share price in what is a volatile and cyclical sector. It has veered from $3.07 per share in 2018 to $4.64 in 2020 and $7.93 in 2021. That was a bumper year for shareholders, who received $16.8bn in total dividends.
The 2022 full-year total dividend dipped to US4.92 per share, which is still respectable. Today’s forecast yield still tempts me at 7.33% for 2023 and 6.41% for 2024. The stock looks good value, trading at just 7.74 times earnings.
I’ve just noticed that Deutsche Bank has just upgraded Rio Tinto for the first time in more than two years, from ‘hold’ to ‘buy’. It’s also lifted its target price from 6,000p to 6,200p (today’s price is 5,121p).
It’s a long-term thing
Deutsche admires Rio’s “high quality, cash generative business”, and, like me, sees an opportunity in its declining share price.
My concern is that now is a bad time to buy commodity stocks, as the slowing Chinese economy may prove more than a temporary shift. There’s no way China can return to the dramatic growth rates of the last three decades, especially with its population now shrinking. The US could fall into recession too.
Rio Tinto’s dividends will rise and fall with its revenues, so I’m not banking on a super-sized yield every year. But since I plan to hold for 10 to 15 years at least, I think I’ll generate a more than acceptable total return over that time.
Once I’ve taken a position over the summer, I’ll turn my attention back to Barclays and Tesco.
