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2 dirt-cheap FTSE 100 dividend shares! Which should I buy in February?

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Image source: Getty Images

UK share markets have got off to a strong start in 2023. The FTSE 100 index of shares has risen 5% since 1 January and sits within a whisker of record highs.

Now I’m searching for the best dividend stocks to buy in February. Are these blue-chip companies too cheap to miss?

Lloyds Banking Group

Today, the Lloyds (LSE:LLOY) share price offers brilliant value for both growth and income investors. They trade on a price-to-earnings (P/E) ratio of 6.7 times. The bank sports a market-beating 5.6% dividend yield too.

However, I’ve dug deeper and I believe Lloyds shares aren’t the bargain they first seemed. In fact, I believe the company’s low valuation reflects its fragile earnings prospects as Britain’s economy struggles.

EY Club research has this week underlined the problems facing cyclical companies like UK-focused banks. The body slashed its GDP forecasts for the next three years as it predicted a deeper recession than first thought (see table).

UK growth forecasts

Year

Previous Forecast

Revised Forecast

2023

-0.3%

-0.7%

2024

+2.4%

+1.9%

2025

+2.3%

+2.2%

Source: EY Club

In this environment, Lloyds and its peers face a prolonged period of weak revenues and elevated bad loans. Lloyds booked £1.05bn worth of loan impairments for the nine months to September alone.

I like the company’s attempts to protect profits in these tough times by streamlining operations. It recently announced the closure of 40 more branches in 2023.

These steps could have a significant long-term benefit too. Lower overheads mean it could be able to compete better with digital-led banks with its products.

But on balance, I still believe Lloyds shares are best avoided right now. Though interest rates are set to rise further, a sickly economic environment bodes badly for short-term earnings growth. And over the longer term, I think it could struggle to grow profits as market competition intensifies.

Rio Tinto

I’d be much happier buying Rio Tinto (LSE:RIO) shares in February. I think its share price could continue rising strongly as China’s economy reopens following pandemic lockdowns.

A surge in Covid-19 cases could stem the mining giant’s recent surge. Rising infections could prompt Beijing to reinstate coronavirus-related barriers.

But I believe a bright long-term outlook still makes Rio Tinto shares a great buy. What’s more, I think the FTSE firm is especially attractive at current prices. It trades on a forward P/E ratio of 11.3 times and carries a 5.8% dividend yield.

The business produces a range of commodities which are tipped to be in hot demand in the coming decades. Take iron ore, a material which generates 65% of its earnings.

Rapid urbanisation in emerging markets, coupled with infrastructure upgrades in the West, should supercharge sales of the steelmaking material. And profits at major producers like Rio Tinto could soar as a consequence.

I think Rio Tinto shares could prove a top investment for capital appreciation and income. This is why it’s already a key holding in my own investment portfolio.

The post 2 dirt-cheap FTSE 100 dividend shares! Which should I buy in February? appeared first on The Motley Fool UK.

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Royston Wild has positions in Rio Tinto Group. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2023