Many FTSE 100 dividend stocks currently look attractive from an income perspective. However, in my experience, chasing companies just because they appear to offer a better dividend than the rest of the market can lead to disaster.
That’s why I’m careful about the companies I invest in right now. I think a large number of FTSE 100 stocks may be forced to slash their dividends in the new year.
FTSE 100 dividend stocks
When analysing dividend investments, there are a couple of red flags I’m always on the lookout for. These include high levels of debt, low returns on investment and a lack of dividend cover.
If there’s one business that ticks all of these boxes, it’s BT. The telecommunications giant cancelled its dividend to investors earlier this year. A few weeks ago, it reversed this decision.
Management announced that the business would resume dividend distributions in March 2022. The group is targeting a progressive policy commencing with a 7.7p per share payout.
This looks promising, but I wouldn’t buy BT for its income potential. The company has a considerable amount of debt, it’s losing customers to competitors, and costs are high. While the group may be able to stick to its dividend timetable, I think there are plenty of other income investments out there with better potential.
Another one of the FTSE 100 dividend stocks I’d stay away from next year is SSE. This utility group is in the middle of a transition. It wants to become one of the UK’s primary renewable energy businesses. This target is commendable, and management is already outlining a multi-billion pound capital spending programme to get there.
Unfortunately, the group already has a lot of borrowing. This may restrict its ability to both invest for the future and return cash to investors.
I’m not saying the company will cut its dividend in 2021. Although, I think if SSE is serious about investing in renewable energy, the organisation may need to reduce the payout to preserve its balance sheet and investment plans.
Under fire from investors
St. James’s Place was one of the most attractive income investments in the FTSE 100. Indeed, I’ve recommended the stock on several occasions. However, the firm’s outlook has changed significantly this year. It has faced significant pressure in the press regarding its high fees and, recently, a large investor criticised the group’s high level of executive pay and low investor returns.
Management has already reduced the interim dividend for the year. A decision on the final payout is expected in February. I think it’s likely investors will see a further reduction in the distribution.
On that basis, I’m avoiding the stock in 2021. St. James’s is facing a lot of flak, and this may hold back its growth in the near term. In my opinion, there are plenty of other companies that offer a better risk-reward ratio for long-term investors.
