Income investors are faced with three challenges in the post-market crash environment. One, there are fewer FTSE 100 dividend stocks to choose from. Many companies withdrew dividends to preserve cash as the economy slid into a recession. Two, the dividend yields are low among those that are still paying a dividend. This is because some companies have reduced their payouts while others already had low dividends. Three, dividend payments are less dependable now. Many companies are still in the woods and there’s no way of knowing how long the slowdown will last.
But there are some FTSE 100 companies that still make a great dividend investment. One example is the tobacco biggies. I’m not discounting the ethical concerns related to these companies. But investors who have already invested in these companies, or find themselves on the other side of the debate, may still find takeaways from this. Further, the tobacco companies themselves are trying to re-invent themselves with next-generation products, though these come with their own complications.
Dividend stocks to buy
Consider Imperial Brands (LSE: IMB). Even after cutting its dividend by one-third (to repay debt), its dividend yield is still 6%, which is higher than that for most other FTSE 100 stocks. It has also paid dividends for a long time. In fact passive income appears to be the key reason investors find the IMB share attractive. I say this because its share price has been falling for a long time, and that’s the catch to buying the share.
Yet, I think buying IMB at the current price may just be a good move. According to the Financial Times, analysts put a low share price estimate for IMB at 1,460p, which is higher than yesterday’s closing price of 1,411p. Further, the average estimate expects the share price to be at 1,800p, which is 25% higher compared to yesterday’s close. In other words, I think for now at least investors can hope to make capital gains with IMB as well as earn an income.
British American Tobacco (LSE: BATS) is another dividend stock to consider. It has a higher dividend yield than IMB, at 7.8%. It’s also quite a bit more upbeat than IMB in its latest trading update, which bodes well for dividends going forward. However, there doesn’t seem to be much upside to the BATS share price, going by analyst estimates. In fact, its share price is already in excess of some analysts’ 12-month targets. This means that this income investment is likely to come at the expense of capital erosion.
If as an investor I’m convinced that the BATS share price will rise significantly from its current levels, by all means it sounds like a worthwhile investment with its high dividend yield. Otherwise, I’d much rather go for Imperial Brands.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. 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 2020