These three FTSE 100 dividend shares carry forward dividend yields comfortably above the 3.5% index average. Are they brilliant shares for investors seeking strong passive income? Or should they be avoided at all costs?
J Sainsbury
Food retailer Sainsbury’s (LSE:SBRY) carries a 5.3% dividend yield for this fiscal year. But rising pressure on its margins makes it a UK share I won’t buy for my own portfolio.
Consumer confidence in the UK fell back to 50-year lows in January as the cost-of-living crisis continued. Following the news, GfK described the outlook for shopper sentiment as “not looking good” and predicted “2023 promises to be a bumpy ride”.
This bodes extremely badly for Sainsbury’s. Average basket sizes are likely to slip as consumers cut back. The company will have to continue slashing prices to avoid losing even more customers to discounters Aldi and Lidl, too.
The pressure to reduce prices is likely to steadily intensify too as the German low-cost chains aggressively expand their store estates. I’ll avoid J Sainsbury shares even though its growing online operation offers a glimmer of hope.
British American Tobacco
In days gone by, stocks like British American Tobacco (LSE:BATS) would have been great buys for tough times like these. The addictive nature of their products enabled profits to grow even when consumer spending ducked.
This particular company owns formidable industry brands like Lucky Strike and Camel. This adds another layer of protection to earnings.
Yet I won’t buy British American Tobacco shares for my portfolio. Not even its 7.9% dividend yield is enough to tempt me in.
The FTSE 100 business faces an uncertain future as legislators slap bans on its traditional combustible products. This week, for example, Mexico introduced some of the harshest anti-smoking laws on the planet. It banned the use of combustible tobacco products in all public places.
Laws are also tightening on the sales, marketing and usage of next-generation products like British American Tobacco’s Vuse vapour technology. As a long-term investor, this is a stock I’m not prepared to risk my cash with.
Aviva
I’d much rather buy Aviva (LSE:AV.) shares to make passive income. That’s even though demand for its financial products could dip in 2023 as Britain’s economy shrinks.
The company’s dividend yield sits a fraction above British American Tobacco’s, at 8%. And I expect profits to rise strongly over the long term as more and more people plan for their financial futures.
Poor returns from traditional savings products means people are becoming more proactive over their finances. Worries over the future of the State Pension are also prompting people to take out financial products to prepare themselves for retirement.
Revenues at Aviva could rise quickly over the next couple of decades. The UK’s older population is growing rapidly and this could supercharge demand for the company’s financial services. I expect this cash-generative stock to provide healthy passive income for years to come.
