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Dividend yields of up to 7.4%! Should I buy these FTSE 100 shares for income in 2023?

Photo of a man going through financial problems
Image source: Getty Images

I’ve been looking for the best FTSE 100 stocks to boost my passive income this year. Should I buy the following income shares for their market-beating yields?

Taylor Wimpey

Housebuilder Taylor Wimpey’s (LSE:TW) dividend yield sits at an impressive 7.6%. And following recent encouraging news I’m considering adding to my holdings in the business.

This week Rightmove announced that average house prices rose at their fastest for three years in January. The news came as Bank of England chief Andrew Bailey told of a correction in the home loans market with rates falling across the board.

As I say this is positive news. However, I’ll be looking for more clues of a housing market rebound before buying more Taylor Wimpey shares. Rates are indeed falling, but demand for homes could still sink as Britain’s economy toils. At the same time housebuilder profits are in peril from elevated construction costs.

This is especially worrying given that Taylor Wimpey’s anticipated dividends for 2023 are covered just 1.3 times by expected earnings. It’s a reading that’s well below the accepted safety benchmark of 2 times. So if profits miss shareholder payouts could fall well short of forecasts.

Tesco

Would income investors like me be better off buying Tesco (LSE:TSCO) shares then? Its dividend yield sits at a lower 4.3% for the next two fiscal years. But in theory payout estimates appear far more robust.

Dividend coverage for the financial years to March 2023 and 2024 sits at 2 times. Fans of Tesco might also argue that food retailers like this are particularly safe income stocks too owing to their defensive operations.

The FTSE 100 supermarket looks in good shape to meet the City’s dividend forecasts. But I think its profits could sink sharply this year (and beyond). Market competition is rapidly increasing and margins are collapsing as the business slashes prices to match Aldi and Lidl.

At the same time Tesco’s cost base is rising. This week Aldi announced it was hiking wages for its warehouse staff by 20%. It followed J Sainsbury’s pledge earlier this month to raise pay to £11 per hour for customer-facing staff.

With supermarkets also battling high food and energy costs the outlook for profit margins is pretty grim. So I’d rather buy other dividend shares today.

BP

Some analysts are predicting another big year for oil prices. The boffins at UBS have for example predicted that crude prices will hit $110 per barrel in 2023, up from current levels around $85.

This in turn could prompt more big dividends from oil majors like BP (LSE:BP). Current broker forecasts leave the FTSE firm with a large 4.2% yield for 2023. Pleasingly this year’s predicted dividend is covered an excellent 4 times by projected earnings too.

But as a long-term investor I’m happy to leave BP shares on the shelf. This is because the company faces an uncertain future as the world switches from oil and gas to renewables and nuclear power.

On the plus side the business is investing heavily in green power. However, the vast majority of spending remains dedicated to fossil fuel projects. I think there are better stocks for me to buy for passive income.

The post Dividend yields of up to 7.4%! Should I buy these FTSE 100 shares for income in 2023? appeared first on The Motley Fool UK.

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Royston Wild has positions in Taylor Wimpey Plc. The Motley Fool UK has recommended J Sainsbury Plc and Tesco 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