One dirt cheap income stock I’d buy in an ISA today and it’s not Imperial Brands or Vodafone

Harvey Jones is on the hunt for a top FTSE 100 income stock at a low price. He’s ruled out two big names, but he’s now itching to buy the third.

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I’ve been loading up on dividend-paying FTSE 100 shares in recent months but there’s one brilliant income stock I haven’t got round to buying. Now I intend to put that right and add it to my Stocks and Shares ISA.

It’s not Imperial Brands (LSE: IMB), even though this is one of the most consistent high yielders on the index. The tobacco maker continues to lavish investors with dividends and boasts a forward yield of 8.3%, nicely covered 1.9 times by earnings.

It’s also dirt cheap, trading at 6.7 times trailing earnings. As if that wasn’t enough, it’s running a £1.1bn share buyback programme too. I don’t care.

One share out of three ain’t bad

I think the controversies around smoking ultimately make Imperial Brands a risky long-term investment.

The group’s fighting a rearguard action against the long-term decline of smoking, but as we’ve seen with vaping, this is only plunging it into new controversies. It may ultimately trigger a tighter regulatory clampdown, such as Rishi Sunak’s smoke-free generation plan.

Imperial Brands has built strong brands, expanded market share and priced for profit growth, but I think this is only going to end one way, so I’m standing clear.

I’m not enthralled by Vodafone Group (LSE: VOD) either. Its long-term share price slide – now approaching a quarter of a century – doesn’t show much sign of reversing. Ignore the growth it’s many supporters say, feel the income.

Unfortunately, the income’s been declining too. Vodafone slashed its dividend by 40% in 2019, but it wasn’t enough. New CEO Margherita Della Valle’s turnaround plan demanded another brutal cut. Yesterday, the board confirmed it would halve the 2024 payout of €0.9 per share, cut to €0.45 in 2025.

Markets actually cheered the news. It puts the dividend on a surer footing, and a 5% yield isn’t the worst. As I recall, markets cheered the last dividend cut too. This is all back-to-front to me.

No company’s without risk

The dividend cut will save Vodafone more than €1bn a year and allow it to invest in its core business. It still leaves a humungous €33.2bn of debt. Not for me.

Asia-focused banking giant HSBC Holdings (LSE: HSBA) isn’t without problems either. Its ever-closer links with China could come back to bite UK investors, as the country charts a collision course with the West.

Yet that hasn’t harmed performance, with the share price up 16.59% in a year. It was boosted by record 2023 profits, which saw profit before tax rocket $13.3bn to $30.3bn. Investors enjoyed the highest full-year dividend since 2008, three share buy-backs totalling $7bn, and a further share buy-back of up to $2bn.

HSBC shares are forecast to yield a thumping 8.9% in 2024, covered 1.6 times by earnings. Yet they’re super cheap trading at just 6.62 times forward earnings.

Its net margins may narrow when interest rates full. The Chinese property market continues to cast a shadow. It’s playing a geopolitical high-wire act. I accept this could be a bumpy ride. Yet it’s pointing the right way, something I wouldn’t say about Imperial Brands and Vodafone.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

HSBC Holdings is an advertising partner of The Ascent, a Motley Fool company. Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended HSBC Holdings, Imperial Brands Plc, and Vodafone Group Public. 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.

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