2 dividend stocks I’d consider buying in May

Roland Head looks at the upside and downside potential of two popular dividend stocks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investors looking for reliable income are probably more likely to choose tobacco than gold. But will this approach prove to be short-sighted? In today’s article I’ll take a look at the latest figures from one company in each of these sectors.

Another 10% dividend hike

Wednesday’s half-year results from Imperial Brands (LSE: IMB) confirmed the group’s policy of increasing dividend payment by 10% each year. Imperial’s interim payout rose from 47p to 51.7p per share. That leaves Imperial on track to deliver a full-year payout of 171.1p per share, which is equivalent to a yield of 4.6%.

Of course, tobacco is a business that’s in decline. Imperial’s tobacco volumes fell by 5.7% to 126.3bn stick equivalents (SE) during the first half of the year. Tobacco net revenue, which excludes taxes, rose by 9.3% to £3,716m at actual exchange rates, but would have fallen by 5.5% if exchange rates had remained unchanged compared to the first half of last year.

The group’s approach to this challenge is to focus on consolidating its sales into a smaller portfolio of its most profitable brands. This appears to be working, as sales of Imperial’s growth brands rose by 3.2% to 73bn SE during the first half. However, increased investment in marketing and other brand-building exercises dented profits. The group’s operating profit fell by 10% to £902m during the first half.

Buy Imperial for income?

This tobacco giant remains a highly cash-generative business. If you’re looking for a pure income stock, then I believe that Imperial Brand’s forecast P/E of 13.8 and dividend yield of 4.6% remain attractive. But for investors seeking growth as well, I think there may be better options elsewhere.

An income from gold?

Egypt-focused gold miner Centamin (LSE: CEY) fell by 5% on Wednesday, after the firm’s first-quarter update left investors fretting about the operational and political risks facing the group.

On an operational level, a move into a lower-grade area of the Sukari mine led to a 20% decline in first-quarter production, which fell to 109,187 ounces. Lower production and lower grades pushed up the group’s all-in sustaining cost (AISC) to $887 per ounce, significantly above full-year guidance of $790/ounce.

Mining output is expected to improve as the year progresses, and management reiterated its full-year production guidance of 540,000 ounces of gold at an AISC of $790/ounce today.  

In some ways, I’m more worried about the political and legal risks facing the group.

Centamin is involved in two long-running legal disputes which date back to 2012. One of these relates to the validity of its mining licence. This remains under appeal, with several possible outcomes, at least one of which could disrupt Centamin’s mining operations.

The other case is a dispute over whether the company should buy fuel at international prices or locally-subsidised rates.

Today’s update warns that Centamin has received an “unfavourable” but non-binding report about the fuel case. However, the company has been paying international fuel prices since 2012 to ensure a reliable fuel supply. This hasn’t prevented strong cash generation or dividend growth, so I’m not overly concerned about this case.

After today’s fall, Centamin stock trades on a forecast P/E of 16 with a prospective yield of 3.1%. That looks fully-priced, given the political risk, so I’d hold for the time being.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any 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.

More on Investing Articles

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »