With its defensive qualities, it’s only natural many income investors turn to FTSE 100 pharma stock GlaxoSmithKline (LSE: GSK) for dividends. What’s more, with decent Q1 figures and last year’s near-£10bn deal with US firm Pfizer helping to reduce debt, the once-precarious-looking payout looks secure.
All told, the company is forecast to return 80p per share again in 2019, which translates to a chunky 5.2% yield.
But that’s not to say that there aren’t other, higher income opportunities elsewhere in the stock market’s top tier. Question is, are they worth the risk?
Better than Glaxo?
Glaxo’s FTSE 100 peer Legal and General (LSE: LGEN) also offers a great yield. One of the things I particularly like about the company from an income perspective is the willingness management has shown to consistently raise payouts for many years now.
The £16bn investment management and insurance business is down to hand out 17.6p per share in the current financial year, equating to a return of almost 6.3%, safely covered by profits.
In addition to this, the diversified £17bn-cap also trades on a cheap-looking valuation at the moment due to concerns over demand for financial services if global growth were to slow.
Based on a near-10% expected rise in profits in 2019, Legal and General can be acquired for a little under nine times earnings. That’s far less than its five-year average P/E ratio of 12.3.
Another stock that plans to return more in dividends than Glaxo is tobacco giant British American Tobacco (LSE: BATS). The owner of brands such as Dunhill and Lucky Strike is predicted to reward loyal holders with 209p per share in 2019. And with shares around the 2900p mark yesterday, that gives a yield of 7.2%, covered 1.5 times by anticipated profits.
Why so high? Because investors continue to be bothered by the decline in the number of people smoking and the threat of further regulation. An example of the latter would be the possible banning of menthol cigarettes in the US.
With regard to the first hurdle, the growing popularity of next-generation products such as vaping should keep the cash coming in for some time to come.
Separately, and as the star fund manager Terry Smith has pointed out, not all regulation is actually bad for tobacco firms. Recent laws prohibiting advertising, for example, actually saved them a lot of cash that would otherwise be spent on marketing.
Moreover, the moat that the tobacco companies have built is sufficient to dissuade any would-be competitors from entering the industry. With this in mind, I’d be more comfortable investing in British American Tobacco over others in the FTSE 100, particularly utility stocks.
On which note, a company that I’m happy to continue avoiding right now is housebuilder Persimmon (LSE: PSN), despite it boasting a simply stonking 11.2% yield for this year.
That may be more than double that offered by Glaxo but, with accusations of poor workmanship, controversial pay rewards for executives and uncertainty regarding Brexit, I think the business isn’t quite as attractive as it first appears.
Persimmon’s stock currently trades on 7.5 times earnings. While this kind of valuation would usually get value investors salivating, it’s worth highlighting cyclical stocks often look like bargains at market peaks. Personally, I think we’re already past this point.
As such, Persimmon is the only one of the three I wouldn’t consider buying before GlaxoSmithKline.
