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I’m searching for the best dividend stocks to buy on the FTSE 100.
Both of the blue-chip shares below offer yields above the index average of 3.8%. But which of these (if any) should I buy for what’s shaping up to be a difficult 2023?
Food for thought
Food retailers like Tesco (LSE: TSCO) are traditionally popular stocks to buy for tough times.
People need to continue eating, whatever economic, political, or social crisis comes along. Therefore, profits at supermarkets tend to remain stable and their ability to pay dividends stays strong.
Well at least that was the case. Competition in the UK grocery market is now so severe that profits-crushing price slashing is accelerating sharply. The impact of this on margins is particularly damaging given the pace at which product, labour and energy costs are all rising for the supermarkets.
The trouble for Tesco is that it’s still failing to keep up with budget chains despite frantic discounting. In normal times this might not be so much of a problem. But when consumers are watching every penny as they are today, a customer exodus can be expected.
German rival Lidl alone is seeing around 770,000 more people in its stores each week compared to last year, it claims.
Tesco at least has its market-leading online operation to soften the blow. In fact this division has plenty of earnings potential as e-commerce rates in the grocery channel improve.
But on balance, I believe the risks to Tesco’s profits now and beyond outweigh this benefit. In fact the dangers are rising as Aldi and Lidl expand their store estates and Amazon invests in its UK grocery operation.
So I’m happy to ignore the FTSE 100 supermarket and its chunky 4.6% dividend yield.
I believe energy producer SSE (LSE: SSE) is a much better income stock to buy for a tough 2023.
Like food, electricity is an essential commodity that Britons can’t do without. But unlike Tesco, power producers like this aren’t being crushed by intense competition.
That said, the prospect of eye-popping windfall taxes is a threat to SSE’s profits and dividends.
In Thursday’s Autumn Statement the Chancellor announced plans to slap a 45% tax rate on electricity generators. Things could get even worse further down the line if Britain’s public finances continue to deteriorate.
A renewable energy star
That said, I still think the highly defensive operations of SSE make it an attractive buy today. The company’s decision to focus on the fast-growing renewable energy segment is another reason I think it’s a top buy.
The FTSE 100 firm operates a fleet of gas-fired plants. But it also owns solar and wind farms in the UK and has ambitious plans to boost its capacity of green energy. Indeed, it’s seeking to increase renewable energy production fivefold between now and 2030.
Today SSE shares carry a healthy 5.6% dividend yield. With spare cash to invest, I’d happily buy it for my own shares portfolio.