2 dividend stocks I’d stay away from and 1 I’d buy

G A Chester discusses the histories and prospects of two dividend stocks in the FTSE 100 (INDEXFTSE:UKX) and one in the FTSE 250 (INDEXFTSE:MCX).

| 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.

Buying and holding FTSE 100 dividend-paying stocks for the long term is a popular strategy. And it’s a sound one, in my opinion. However, just because a company is a member of the blue-chip index and pays a dividend, it doesn’t necessarily make it a good candidate for buy-and-hold investors.

Superficially attractive

Marks & Spencer (LSE: MKS) is a case in point. As things stand, if you bought the stock at almost anytime in the last quarter of a century, and are still holding today, the share price is almost certainly lower than the price you paid. Factor in inflation and the picture is even less pretty.

The dividend record is also hugely disappointing. In nine of the last 20 years, the company has either slashed the payout, or failed to increase it from the prior year. Another flat dividend is expected for the current year. This would give a paltry and sub-inflationary five-year compound annual growth rate (CAGR) of 1.9%.

I view M&S’s current ‘cheap’ forward price-to-earnings (P/E) ratio of 11 and dividend yield of 6.5% as only superficially attractive. However, my Foolish colleague Roland Head reckons current chairman Archie Norman’s turnaround record with other retailers is a cause for optimism. But other well-qualified executives have previously tried and failed to put M&S on a path to sustainable growth. And with conditions on the high street being tougher than ever, this is a stock I’m happy to avoid.

Meaty but pricey

FTSE 250 firm Hilton Food Group (LSE: HFG) was established in 1994 to run a meat packing facility to supply Tesco UK. It’s since expanded its foods, customers and geographical reach. The shares have risen 550% since its stock market flotation in 2007 and its dividend has increased at a CAGR of around 10%.

The group is very well managed by an experienced team. Customers like Tesco can drive hard bargains when it comes to contractual renewal terms (at five- to 10-year intervals) and the competitive nature of the market is evident in Hilton’s operating margin, which is running at 2.7%. Despite this, the company delivers an impressively high return on capital employed.

One concern I have about Hilton. Although the business has grown and expanded, customer concentration remains a risk. Just four customers provide 96% of the group’s revenue, led by Tesco at 48%. I don’t see this as fatal to the investment case, but combined with Hilton’s pricey forward P/E of 24 and modest dividend yield of 2.2%, I’m inclined to avoid the stock at the present time.

Fag-tastic value

Returning to the FTSE 100, one company I’d be happy to buy right now is £25bn tobacco group Imperial Brands (LSE: IMB). This cash-generating machine trades on a forward P/E of 10, with a prospective dividend yield of 7%.

For decades, tobacco companies have overcome or adapted to all manner of obstacles and delivered excellent returns for investors in the process. Consolidation in the industry has left it dominated by a relatively small number of big players. And while there are new entrants in the emerging market of next generation products (electronic cigarettes and so on), the tobacco giants have the financial clout to dominate here, too.

Imperial has delivered nine consecutive years of 10% dividend growth and its policy is to maintain that rate over the medium term. It bodes well for the next generation of investors in the company.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Tesco. 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

Close-up of British bank notes
Investing Articles

£8 per year in extra income for life, for each £100 invested today? Here’s how!

Christopher Ruane explains how he would aim to set up extra income streams for the rest of his life by…

Read more »

Photo of a man going through financial problems
Investing Articles

With a £20K Stocks and Shares ISA, I’d target £1,964 in annual dividends like this

With an annual passive income target close to £2,000, our writer explains how he'd put a £20K Stocks and Shares…

Read more »

Illustration of flames over a black background
Investing Articles

Down 63% in 2024, what’s going on with the Avacta (AVCT) share price?

2024 has been a difficult year for many companies in the biotechnology sector, with the AVCT share price down heavily.…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’d invest £800 the Warren Buffett way!

Christopher Ruane learns some lessons from super-investor Warren Buffett he hopes could improve his own stock market performance.

Read more »

British Isles on nautical map
Investing Articles

Michael Burry just bought 175,000 shares in this FTSE 100 company

Scion Asset Management announced a $6.5bn stake in BP this week. But what could Michael Burry be seeing in an…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

£5,000 in savings? Here’s how I’d aim to start making powerful passive income today

With a cash lump sum to invest, this Fool lays out how he'd start making passive income. He also details…

Read more »

Investing Articles

Just released: our 3 top small-cap stocks to consider buying before June [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

My best FTSE 250 stock to consider buying now for passive income while it’s near 168p

This is a rare stock with a growing underlying business and a fat dividend yield – it’s worth consideration for…

Read more »