Are these the best FTSE 100 dividend stocks in September 2023?

The FTSE 100 has experienced a volatile 2023, starting the year at 7,554 points, before breaking the symbolic 8,014 points barrier in February, and then falling to as low as 7,257 points in early July.

The index now stands at 7,505 points after yet more volatility — widely expected given the FTSE’s overweighted composition of oilers, miners, and banks. For context, FTSE Russell data shows that 82% of FTSE 100 companies’ income is derived from overseas.

This means that the strength of sterling is more important to it than UK domestic economic performance, because if a FTSE 100 company generates most of its revenue in US dollars, and then converts this revenue into sterling, a weaker pound means that the company will report higher earnings.

This matters because when the Bank of England increases the base rate, the pound strengthens, hurting FTSE 100 corporate income. Of course, if rates start to fall, it hurts different FTSE 100 companies which are reliant on imports. And this effect is compounded by the international nature of FTSE 100 businesses, as the uncertainty of a global recession continues, amid a deflating Chinese economy and resilient western ones.

Domestically, the trajectory of both inflation and interest rates in the UK remains ambiguous.
CPI fell from 8.7% in May to 7.9% in June — exceeding forecasts of a drop to 8.2%.

However, while the markets are set by expectations. 7.9% CPI inflation is still higher than the 7.0% print of March 2022, and almost quadruple the official 2% target. And analysts still believe that the base rate will rise to 5.75% by the end of the year — and stay there for some time.

This week will be crucial in determining where the base rate goes next. Tuesday will bring unemployment numbers and wage growth data, and Wednesday the all-important CPI print; anything outside of expectations will likely see analysts rapidly reprice their prediction models as has been the case so far this year.

Perhaps worryingly, a survey from The Chartered Institute of Personnel and Development has found that 40% of employers have made counteroffers to keep hold of staff tempted by higher wages from rivals over the past 12 months.

Best FTSE 100 dividend stocks to watch

1. Lloyds

Lloyds shares have continued to trade consistently within a range of approximately 40p-50p since April 2021, leaving some dividend investors to consider the FTSE 100 bank undervalued. For context, shares are changing hands towards the lower end of this range at present, leaving the FTSE 100 bank with a reliable 5.9% dividend yield — which was increased recently by 15% to 0.92p per share in recent Q2 results.

Q2 earnings just missed analyst estimates, with underlying net income down to £4.52 billion — but the real concern is perhaps that underlying impairments rose from £243 million to £419 million.

Lloyds is by far the largest mortgage lender in the UK, and the bank has no international exposure. While it does have more financially stable customers than average — with the average income of customers at £75,000pa — falling house prices, borrower stress, and reducing sales activity may become an issue over H2.

While deposit outflows and falling loan growth continue, the silver lining was that net interest margins are now expected to be over 3.1% for the full year, an upgrade from the 3.05% previous guidance. And importantly, the bank’s all-important CET1 ratio stands at 14.2%, far above the standard 12.5% target.

One potential risk comes from continued political pressure to improve savings rates for customers, cutting into profit margins. Some think a one-off public charge — akin to the Italian bank windfall tax — may be put in place if banks don’t do enough, creating a practical ceiling to Lloyds’ profits.

2. Glencore

Glencore shares have fallen by 6.1% over the past month to 438p. Following similarly poor results at FTSE 100 rivals Anglo American and Rio Tinto, adjusted core earnings fell by more than 50% to $9.39 billion, a far worse result than city analyst estimates.

However, the dividend yield remains at 8.4%, marking a potentially attractive entry point for a company that may be a little oversold. As CEO Gary Nagle notes, this period ‘may not be the bonanza that everybody was expecting, but China is not all that bad,’ referencing the country’s increased governmental economic support promises as it fights creeping deflation.

Further, the company is gearing up for the next bull cycle, especially in the critical minerals space. It’s made a $22.5 billion bid for Teck’s coal assets, and increased interests at various companies while simultaneously selling off 20 non-core assets.

Nevertheless, it’s working through a complex time in the commodity markets. The critical minerals supply gap may see prices start to rise soon, but falling coal prices were at least partially responsible for its weak results — and it’s even considering stockpiling cobalt as prices slump.

3. Legal & General

Legal & General has been a FTSE 100 dividend favourite for years, and while past perfomance is no guarantee of future results, 2023 may be no different. Its share price has dropped by 8.3% year-to-date, leaving LGEN with an attractive dividend yield of 8.4%.

Its reliable dividend is secured by a wide economic moat; the brand is well recognised and generally trusted by over 10 million customers in the competitive finance sector. Further, it sports a diversified business model, focusing on pensions, annuities, and equity release products, which provides solid growth opportunities as western populations age.

Most significantly, the company increased its full-year dividend by 5% to 19.37p in 2022, demonstrating a commitment to rewarding shareholders.

The FTSE 100 insurer boasts a strong balance sheet, reflected by its a Solvency II coverage ratio of 240%. In FY22 results, LGEN saw operating profit rise by 12% to over £2.5 billion, with a return on equity of 20.7% and new business from PRT rising from £7.2 billion to £9.5 billion. This growth included a 23% increase from international markets, highlighting the FTSE 100 company’s expansion plans in the US, Asia, and Europe.

The only concern to consider — other than inflation — is that long-term CEO Nigel Wilson is leaving at the end of the year. His replacement, António Simões, has already been selected and will formally take up his post on 1 January 2024. Volatility is often expected around handovers.

The company reports earnings this week, which may involve positive share buybacks in addition to dividend announcements.