These FTSE 100 and FTSE 250 shares offer dividend yields far above the average for UK shares. But are they top stocks to buy or simply value traps?
Tobacco titan Imperial Brands’ (LSE:IMB) 8% forward dividend yield makes it one of the highest yielders on the FTSE 100 today.
And unlike many UK shares in the current macroeconomic climate, the business looks in solid shape to meet current dividend forecasts. The predicted payout is covered almost two times over by expected earnings.
The addictive nature of Imperial Brands’ products gives profit (and by extension dividend) estimates extra robustness too. So does the strong customer loyalty that its brands like Winston and John Player Special command.
But this is a dividend stock I’m avoiding. I actually sold my holdings in the business several years ago. And since then its share price has cratered as anti-smoking regulation has ramped up across the globe.
Rules on the sale, marketing, and use of cigarettes and other combustible tobacco products are becoming commonplace. They’re exacerbating existing concerns over the health impact of smoking and limiting sales to new generations of smokers.
Unfortunately for Big Tobacco, legislators are also increasingly clamping down on next-generation products like e-cigarettes and tobacco heating products (THPs) as well. Australia is the latest country to ban recreational vaping in recent months to combat vape use among teenagers.
Imperial Brands has spent a fortune developing products like its Pulze thermal heated device. But doubts are rising over whether these new technologies will save the company’s bacon in an increasingly smoke-free society.
I expect the share price to continue shrinking as its market does. Not even the prospect of big dividends in the near term is enough to encourage me to invest.
Tritax Big Box REIT
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I’d rather use any spare cash I have to buy more shares in Tritax Big Box REIT (LSE:BBOX). I opened a position here in 2020 and a 7.7% forward dividend yield is making me consider increasing my stake.
Tritax’s share price soared on 19 July thanks to better-than-expected inflation data. The bad news is that interest rates look set to keep rising, damaging the company’s growth plans as borrowing costs increase. However, the new consumer price inflation (CPI) suggests rates may not soar as high as experts had feared.
I think the FTSE 250 business is a great share to buy for passive income. Under real estate investment trust (REIT) rules, it is obliged to pay a minimum of 90% of annual profits from rental operations out in the form of dividends. This removes the chance of those who run the company from deciding to hold on to the cash or spend it on other things.
So as demand for large warehouse and distribution hubs picks up I think dividends here could grow strongly. Some of Tritax’s major clients include Amazon, Ocado and Morrisons. I expect the industry to grow strongly thanks to themes like the growth of e-commerce and automation.