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2 dividend stocks I’d stay away from and 1 I’d buy

Buying and holding FTSE 100 dividend-paying stocks for the long term is a popular strategy. And it’s a sound one, in my opinion. However, just because a company is a member of the blue-chip index and pays a dividend, it doesn’t necessarily make it a good candidate for buy-and-hold investors.

Superficially attractive

Marks & Spencer (LSE: MKS) is a case in point. As things stand, if you bought the stock at almost anytime in the last quarter of a century, and are still holding today, the share price is almost certainly lower than the price you paid. Factor in inflation and the picture is even less pretty.

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The dividend record is also hugely disappointing. In nine of the last 20 years, the company has either slashed the payout, or failed to increase it from the prior year. Another flat dividend is expected for the current year. This would give a paltry and sub-inflationary five-year compound annual growth rate (CAGR) of 1.9%.

I view M&S’s current ‘cheap’ forward price-to-earnings (P/E) ratio of 11 and dividend yield of 6.5% as only superficially attractive. However, my Foolish colleague Roland Head reckons current chairman Archie Norman’s turnaround record with other retailers is a cause for optimism. But other well-qualified executives have previously tried and failed to put M&S on a path to sustainable growth. And with conditions on the high street being tougher than ever, this is a stock I’m happy to avoid.

Meaty but pricey

FTSE 250 firm Hilton Food Group (LSE: HFG) was established in 1994 to run a meat packing facility to supply Tesco UK. It’s since expanded its foods, customers and geographical reach. The shares have risen 550% since its stock market flotation in 2007 and its dividend has increased at a CAGR of around 10%.

The group is very well managed by an experienced team. Customers like Tesco can drive hard bargains when it comes to contractual renewal terms (at five- to 10-year intervals) and the competitive nature of the market is evident in Hilton’s operating margin, which is running at 2.7%. Despite this, the company delivers an impressively high return on capital employed.

One concern I have about Hilton. Although the business has grown and expanded, customer concentration remains a risk. Just four customers provide 96% of the group’s revenue, led by Tesco at 48%. I don’t see this as fatal to the investment case, but combined with Hilton’s pricey forward P/E of 24 and modest dividend yield of 2.2%, I’m inclined to avoid the stock at the present time.

Fag-tastic value

Returning to the FTSE 100, one company I’d be happy to buy right now is £25bn tobacco group Imperial Brands (LSE: IMB). This cash-generating machine trades on a forward P/E of 10, with a prospective dividend yield of 7%.

For decades, tobacco companies have overcome or adapted to all manner of obstacles and delivered excellent returns for investors in the process. Consolidation in the industry has left it dominated by a relatively small number of big players. And while there are new entrants in the emerging market of next generation products (electronic cigarettes and so on), the tobacco giants have the financial clout to dominate here, too.

Imperial has delivered nine consecutive years of 10% dividend growth and its policy is to maintain that rate over the medium term. It bodes well for the next generation of investors in the company.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands and Tesco. 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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