ESG is a term used to refer to the environmental, social and governance elements of a company. An ESG-friendly firm is one that takes note of the responsibility it has on these three points. In recent times, ESG investing has become very popular, as investors try to buy more sustainable stocks for the long run. As an income investor, can I ESG and income together and find ESG-friendly dividend stocks? I think I could.
ESG-friendly stocks via renewable energy
If I had £1,000 to invest, I’d allocate half to SSE (LSE: SSE). The energy company might be well known as a household gas and electric supplier, but it’s also pushing hard with regards to renewable energy.
For example, it has the largest offshore wind development pipeline in the UK and Ireland at 6GW. To put this into perspective, one gigawatt (GW) of power is equivalent to around 3m solar panels. By 2030, SSE also has committed to reducing carbon intensity levels by 60%.
These initiatives make the company a clear ESG-friendly stock. But what about it being a dividend-friendly stock for passive income? Currently the share offers a dividend yield of 5.36%. This is well above the FTSE 100 average yield around 3%.
Looking forward, I think the dividend can be sustained at this level. In the annual results, net assets actually grew to £6.6bn from £4.9bn. This was supported due to its disposal programme, which generated cash proceeds of £1.5bn.
One risk here is that the energy sector is very competitive and tightly regulated. If the push for ESG priorities ends up being very expensive versus traditional goals, SSE could easily lose out on market share if prices rise to compensate for higher costs.
A dividend cut, but still good value
For the other £500, I’d consider buying shares in GlaxoSmithKline (LSE:GSK). What makes the pharmaceuticals giant an ESG-friendly dividend stock?
On the ESG front, it takes the top spot in the Access To Medicine 2021 index. It scored 4.23, the top reading based on governance of product access, research and development and other factors. This is in relation to making medicine more accessible to those who can’t afford it, or to third-world countries.
I’d also classify it as a robust dividend stock, even with the proposed dividend cut. The yield will fall from current levels of 80p per share down to 55p in 2022. Yet this is due to GSK splitting up into two companies. My colleague Roland Head explained the new situation very well, which can be read here.
The bottom line is that the split should create a more streamlined consumer unit, which is better for longer-term growth. This should also aid future dividend payouts.
Although I see the split as an opportunity, it’s also a risk. Such a split can be messy, leading to higher costs in the short run until everything gets smoothed out. It also looks like the new GSK company that existing shareholders will be transferred to will carry quite heavy levels of debt. This is a concern for me as an income investor.
Overall, I think that both GSK and SSE are ESG-friendly dividend stocks. As a result, I’d split my £1,000 evenly and look to buy both.
