The London Stock Exchange is full of dividend shares that investors can leverage to generate passive income. And with the stock market going into a bit of a tailspin due to inflation, many of these firms are offering generous yields.
Even today, after enjoying a rally for the first half of 2024, there remains plenty of lucrative opportunities for investors to capitalise on. However, not all of these may prove to be winning investments.
Investors can behave irrationally when they start to panic. But in some cases, a mass sell-off may be justified. And looking at the market today, there are two dividend shares that I’m steering clear of.
Energy infrastructure’s expensive
National Grid (LSE:NG.) has long been one of the most popular dividend shares to own. And it’s not difficult to understand why. The group’s raised its shareholder payouts for more than 25 consecutive years. And since demand for electrical infrastructure isn’t going to disappear any time soon, the firm seemed set to continue with this trend for many years to come.
Unfortunately for management, interest rates made a surprise comeback. With a highly leveraged balance sheet, the company quickly found itself in hot water. And management’s been forced to take drastic action in the form of the largest corporate restructuring seen in over a decade.
The plan is to invest £60bn by 2029 to re-spark growth into the business while simultaneously paying down debts. To achieve this, the firm’s selling off non-core assets as well as issuing new shares, raising £7bn. But most frustratingly for income investors, the dividend was also put on the chopping block, ending National Grid’s reign as a Dividend Aristocrat.
To management’s credit, if the group’s strategy’s successful, investors could start seeing double-digit growth re-emerge. And with more cash flowing to the bottom line, dividends may eventually make a comeback. However, corporate restructurings of this scale are pretty challenging to pull off with a lot of unknowns. Therefore, personally, even with a 4.7% yield, I’m not tempted to buy any shares today.
Addictive but restrictive
Another popular dividend share among those who don’t mind investing in tobacco companies is British American Tobacco (LSE:BATS). Unlike National Grid, this business has managed to retain its Aristocrat status despite offering a notably higher yield of 8.5%. What’s more, management intends to ramp up the return on investor capital even further next year.
However, it’s no secret that tobacco companies are facing increased pressure from regulators. That’s why most have started diversifying into seemingly healthier alternatives such as vaping. British American Tobacco’s no exception. But even these products are starting to get attention from regulators.
Ignoring this uncertainty, it seems that management may have also been a bit ambitious with its milestones since it now thinks it will miss its £5bn sales target for its non-combustible products by 2025. In the meantime, sales of traditional cigarettes are also trending downward, with combustible revenue falling by 10.1%.
All things considered, there’s just too much long-term uncertainty surrounding this business to warrant an investment today. At least, that’s what I think.
