Until recent years, Diageo (LSE:DGE) stock wasn’t really known for an attractive dividend yield. A soaring share price kept the yield in check, and investors were more than happy to scoop up shares for the global growth potential of its powerful portfolio of alcohol brands.
However, Diageo is now on course for its fourth successive year of negative returns. It’s down 35% year to date and more than 40% over five years. As such, the 4.7% dividend yield now exceeds what I can get from cash or a FTSE 100 tracker.
So, should I add Diageo stock to my portfolio for its income prospects?
I have doubts
There are three main things that make me hesitate in buying Diageo for its dividend. First, sales continue to be weak, with organic net sales flat in its most recent fiscal FY26 Q1 trading update.
It said there was notable weakness in Asia Pacific and in Chinese white spirits. And while there was decent progress in Latin America, Europe and Africa, softness persisted in Diageo’s key North American market.
For fiscal 26 we have updated organic sales and operating profit guidance for the adverse impact from Chinese white spirits and a weaker US consumer environment than planned for.
Diageo, November 2025.
Second, Diageo’s balance sheet is starting to be a bit of a concern. At the end of June, net debt stood at $21.9bn, with a leverage ratio of 3.4 times adjusted EBITDA.
That strikes me as high, and it doesn’t leave too much financial flexibility. Diageo plans to get this down to a target range of 2.5 to 3 times by no later than FY28 (which starts in mid-2027 for Diageo). It has agreed to sell its East African Breweries stake for $2.3bn next year, which should help.
Third, new CEO Sir Dave Lewis starts in January. To improve the balance sheet, I think there’s a good chance the dividend will be cut. I may be wrong, of course, because we don’t know what Lewis will do. But I think buying this stock anticipating a 4.7% yield would end in disappointment.
Other reasons
On the other hand, I wouldn’t rule out rebuying Diageo in the coming months (I sold it roughly one year ago). That’s because the stock is so deeply depressed that the risk-reward balance now looks attractive.
Diageo sells for 13 times forward earnings right now (late December 2025) — that just seems to me to be too low for a quality business like this. Meanwhile, the firm is lapping weak comparable results, so I suspect the bad news is priced in already. I think there might now be a solid margin of safety here.
Of course, the new chief executive can’t magically make consumer spending weakness disappear, or trends like increasing use of GLP-1 weight-loss drugs (Wegovy and Mounjaro). But I’m interested in getting on board a potential Diageo recovery train in 2026.
The Guinness and Tanqueray maker reports first-half earnings in February. I’ll listen in to what management says then, with a possible view to buying some Diageo shares for my ISA.
Before then, I’ll be looking at other opportunities, as well as consuming Diageo brands like Baileys over the festive period!
