Stocks and shares are a great way of generating passive income. However, this money can never be guaranteed.
With this in mind, I think the dividend credentials of some FTSE 100 shares are on particularly shaky ground.
Dangerously high yield
With a standard FTSE 100 tracker yielding around 3.8%, that initially looks very tempting.
The problem is that this payout might only just be covered by profit. So any unforeseen trading-related issues and management may be forced to dip into reserves. Or cut the income stream.
I think the latter is more likely considering the huge amount of investment required to keep its infrastructure going (not to mention the cash required to service is enormous debt).
To add to the mix, Vodafone is now facing regulatory scrutiny over its proposed tie-in with Three to create the country’s biggest mobile operator.
To help push through the deal, both companies have said they will invest £11bn to build a 5G network in Britain. But that would surely mean Vodafone placing even more pressure on its finances if it’s given the green light.
Considering the above, I’m not surprised the shares are down 9% in 2023, so far.
Now, a contrarian might suggest that a lot of negativity is already priced in and that Vodafone only needs to surprise slightly on the upside for investors to pile back in. This theory could be put to the test when half-year numbers are announced on 14 November.
I’m not holding my breath though. On which note…
Out of puff?
Tobacco giant Imperial Brands (LSE: IMB) has problems of its own.
The latest headwind is Rishi Sunak’s proposal to raise the age at which smoking is legal by one year every year. Theoretically, this would mean a 14-year-old today would never be able to purchase cigarettes.
Interestingly, Imperial’s shares bounced a day after this announcement as the firm released its latest update. A £1.1bn share buyback went down well with the market, as did news that trading was in line with expectations.
The suggestion from Imperial’s rival British American Tobacco that this move would do little but fuel underage smoking (and be hard to enforce) was also embraced by investors.
However, it would be foolhardy to think the spectre of further regulation will quietly go away. New-generation products like e-cigarettes could be next in line.
When this is combined with the long-term decline of tobacco use, I’m left wondering whether the dividend policy at this company is likely to be revised eventually.
It seems I’m not alone in being a bit negative. The shares are down 17% in 2023 alone.
Still, the near 9%-yield is expected to be covered far more securely by profit than over at Vodafone. It’s for this last reason that I’d buy Imperial Brands shares if forced to make a choice between the two today.
However, I’d much prefer to snap up better-quality companies elsewhere in the market. This is even if it means accepting a low(er) yield on the stock for my trouble.