The FTSE 100 is back at lockdown levels. The truth is that it’s been slowly declining since June. This is great news for those of us looking for dividend shares to buy because these stocks are getting cheaper. However, it seems that for every company increasing its dividend, there’s another one issuing a profit warning. So we need to look carefully at those we buy.
Dividend stocks are a great way to build wealth for an ISA. The combination of tax-free returns and passive income is a potent combination for many income investors. Two Footsie dividend stocks that appear to me to offer good returns currently are pharmaceutical giant GlaxoSmithKline (LSE: GSK) and tobacco firm, Imperial Brands (LSE: IMB). But I’d only buy one of them.
A quality dividend stock: GlaxoSmithKline
The hunt for a Covid-19 vaccine makes pharmaceutical firms a favourite for many income investors. In addition, the defensive nature of these stocks means they’re a good choice for difficult economic times since healthcare products are always in demand. Moreover, GSK has brand leaders in all of its markets, giving the firm a large advantage when compared with its peers.
Offering a juicy dividend yield of 5.9%, and dividend cover of 1.5x earnings, Glaxo’s return is attractive and likely sustainable. However, I’d prefer a slightly higher dividend cover figure, around 2x for complete peace of mind. Notably, Glaxo didn’t cut its payout this year, unlike many other FTSE dividend favourites.
Currently selling around 1,356p, Glaxo is trading at a good price, I feel. Indeed, some analysts have given the stock a fair value of around 1,800p. Consequently, I think this is a bargain price for a quality stock with a relatively impressive return.
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Big tobacco is often a preferred dividend stock to buy for many income investors. Selling around 1,244p at the time of writing, Imperial offers an outstanding trailing dividend yield of 16.6%! Amazingly, this is after recent cuts to its dividend, meaning that this eye-popping yield is a consequence of people selling the firm’s shares.
And there’s a reason for that. Despite a reputation as a defensive stock, the tobacco industry has had its fair share of problems recently. Vaping was supposed to be an alternative market to tobacco, but in the large US market, government regulation is impeding Imperial’s growth.
In addition, it has dividend cover of only 0.5x earnings and a large amount of debt on its balance sheet. This makes me wonder whether the dividend yield can be sustained. The headwinds facing the company may well prevent any potential for capital gains for a while too. Subsequently, I’m not adding Imperial to my ISA.
Dividend stocks are a great way to build wealth, but the dividend needs to be sustainable. I think GSK offers this quality and I’ll happily increase my holdings. Imperial Brands, on the other hand, despite the crazy yield, is less attractive. I won’t be buying it because I think there are better opportunities for wealth-building out there.
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Rachael FitzGerald-Finch owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and 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.
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