When it comes to income investing, a high yield is a good place to start. After all, the receipt of a high income return is the most common reason to buy dividend stocks. However, there’s more to income investing than a stunning headline yield. The risk of dividend cuts, the potential for dividend growth and the stability of the company in question are all key areas to consider. With that in mind, are these two popular FTSE 100 dividend stocks really all that great?
A rock-solid utility
While there are concerns about the performance of the UK and global economies in 2017, investors in National Grid (LSE: NG) are unlikely to be overly concerned. After all, electricity transmission is unlikely to be affected by changes in the macroeconomic outlook. That’s a key reason why the company is such a strong dividend stock, since it offers one of the most dependable and consistent income streams in the FTSE 100.
In addition, National Grid aims to at least match inflation in its dividend growth rate. This may not sound like a particularly useful policy for investors while inflation is relatively low. However, should inflation reach the Bank of England’s forecast of nearly 3% in 2017, National Grid’s inflation-matching dividend growth could become a useful ally for its investors. This could also improve demand for the company’s shares and push them higher over the medium term.
With National Grid yielding 4.8%, it continues to be among the highest-paying income shares in the FTSE 100. However, its robust business model and dividend growth potential are the main reasons why it’s deserving of its status as a great income stock.
Of course, National Grid isn’t the only high-yielding share with defensive characteristics. Imperial Brands (LSE: IMB) has an excellent track record of raising dividends per share. In fact, they’ve risen at an annualised rate of over 10% in the last three years. Further growth at the same pace is forecast over the next two years. This could put the company’s shares on a yield of 5% in 2018.
As well as a fast-growing yield, Imperial’s business model combines defensive and growth qualities. The tobacco part of the business is relatively stable and almost utility-like. Demand for cigarettes is likely to remain buoyant and could even grow across the emerging world – especially as population growth continues. Meanwhile, the company’s e-cigarette division offers exposure to what remains a rapidly-growing sector. Double-digit sales growth within the e-cigarette industry looks set to continue over the medium term, with Imperial well-placed to benefit from this.
Imperial trades on a price-to-earnings (P/E) ratio of 14. Given its 9% earnings growth which is forecast for the current year, this indicates that it offers good value for money. Alongside its dividend growth outlook and its mix of defensive and growth characteristics, this suggests it’s one of the very best income stocks the FTSE 100 has to offer.
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Peter Stephens owns shares of Imperial Brands and National Grid. The Motley Fool UK has recommended Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.