I’m always on the lookout for FTSE 100 dividend stocks to buy for my portfolio.
Income stocks can provide a level of security in a portfolio. I own these stocks alongside growth shares, which can be more volatile. As such, I think the combination of income and growth stocks allows me to achieve the best of both worlds, namely growth and stability.
Unfortunately, not all dividend stocks are created equal. When looking for stocks to buy, I tend to avoid companies that pay out the majority of their profits to investors, as this is usually unsustainable.
There are a couple of FTSE 100 companies that fall into this bucket. And with that in mind, here are two lead index dividend stocks I’m planning to avoid and would sell if I already owned them in my portfolio. I’d replace these companies with some of my favourite income stocks in the blue-chip index.
FTSE 100 dividend stocks to sell
The first company is National Grid (LSE: NG). This has been a dividend champion and stalwart of income investors portfolios for years. Therefore, some investors might wonder why I wouldn’t own this income champion.
The reason’s simple. Even though the stock currently supports a dividend yield of around 5%, National Grid’s facing increasing pressure from policymakers. It’s been attacked for being inefficient and prioritising dividends over investment.
As well as these criticisms, the UK electric grid is at a crucial junction. As the renewable and green energy industries expand, electricity demand will grow. National Grid will have to invest significant sums to meet the challenges of this transition. If it doesn’t, it’ll attract further criticism.
Some analysts have already speculated that without significant investment in the UK electricity grid, there could be blackouts. Rising numbers of electric vehicles will place increasing pressure on the grid, which it might not be able to withstand.
That said, National Grid does have a virtual monopoly over the electricity infrastructure in England. Therefore, the company may be able to navigate the hostile environment quite successfully. However, considering the risks outlined above, I wouldn’t want to own the stock in my portfolio.
Gasping for air
I’d also sell shares in Imperial Brands (LSE: IMB). Once again, this FTSE 100 company is generally considered to be an income champion, but I’m not convinced.
There are three reasons why. First of all, the number of smokers around the world’s declining. This will put pressure on the group’s top and bottom lines. Secondly, the sector’s heavily regulated and taxed. If policymakers want to stamp out smoking, they could quite easily do so.
And third, Imperial has a fragile balance sheet. It’s been paying out almost all of its earnings to investors via dividends, which has starved the rest of the group of cash. Considering the challenges of operating in a highly regulated and declining market, this isn’t a good position for the company. It has little-to-no breathing space if there are any significant changes to its operating environment.
Considering these risks, I’ll avoid the stock even though it currently supports a dividend yield of just over 9%.
That doesn’t necessarily mean this is going to be a bad investment. The group’s made significant investments in so-called reduced-risk products, and this market’s still expanding.
Also, in the past, cigarette companies have been able to increase prices to offset declining sale volumes. Imperial may be able to maintain this strategy and support its dividend.
FTSE 100 dividend stocks to buy
There are a couple of companies that stand out to me as being great income investments at present. The first company’s the generic drugs producer Hikma (LSE: HIK).
This group produces generic and low-cost versions of drugs for sale around the world. I think this is an exciting growth market. As the global economy expands, I think the demand for healthcare will only increase.
Unfortunately, not all consumers have access to free healthcare, or can afford to pay for it. This is why I believe the demand for low-cost generic versions of drugs will grow exponentially. Many billions of consumers worldwide can’t afford expensive treatments, Hikma can help them gain access to these drugs.
Over the past decade, the company’s carved out a niche for itself in the market. It’s invested significant sums in research and development in manufacturing. As a result, profits have expanded rapidly, and so has the group’s dividend.
Although the stock only supports a dividend yield of around 1.6%, at the time of writing, I reckon management will continue to hike the payout as profits rise. That’s why I think this is one of the best FTSE 100 dividend stocks to buy and I’d snap up the shares right now.
I’d also buy FTSE 100 retailer Tesco (LSE: TSCO) for my portfolio of dividend shares. I’m looking for companies to add to my portfolio that have a steady and predictable income stream. Tesco ticks this box. Consumers will always need to eat and drink, which suggest there’ll always be a market for the company’s goods.
In recent years, the company’s undergone a substantial transformation. It’s slashed costs and streamlined operations. As a result, its balance sheet’s now stronger than it has been for some time and cash generation is robust.
In its latest results release, the group announced a £500m share back as a way of rewarding investors. I wouldn’t rule out further cash returns. That’s why I’d buy the stock and its 4% dividend yield.
Some challenges the company may face, which could reduce profits and limit cash returns, include higher wages and food inflation. Both of these headwinds could push up costs and squeeze margins.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals, Imperial Brands, National Grid, 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.