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£5k to spend? I’d buy and hold these 2 FTSE 100 dividend bargains in an ISA for a decade

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If you buy individual company stocks and shares, you need to build a balanced portfolio to limit your exposure if one of them underperforms.

I would start with a blend of established FTSE 100 dividend stocks, so that your wealth keeps growing even when the stock market stagnates. The following two aren’t the dividend powerhouses they once were, but still merit your attention.

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GlaxoSmithKline

Pharmaceutical giant GlaxoSmithKline (LSE: GSK) is more of an income than a growth stock, but its shares have modestly outperformed over the last five years, growing 20% against 12% for the FTSE 100 as a whole.

The £83bn behemoth remains one of the biggest stocks on the index, beaten only by Royal Dutch Shell, HSBC Holdings and BP, and a redoubtable source of income. That said, the yield has now dropped below 5%, with a forward yield of 4.8%, covered 1.5 times by dividends.

This is down to CEO Emma Walmsley’s forward-looking strategy of jam tomorrow in the shape of investment in its future pipeline of drugs, rather than keeping investors sweet with regular dividend hikes. If this continues, the payout is on course to be stuck at 80p for a whole decade, and investors will be hoping the pipeline is unblocked soon.

Yet analysts expect earnings to fall 2% this year, and rise just 1% in 2020. I wouldn’t let that worry you, Walmsley has given the group renewed focus since her appointment in 2017, and may delight the City by breaking up the business to release pent-up value, including the flotation of its recent £10bn hook-up with Pfizer.

The Glaxo share price currently trades at a forward valuation of 13.9 times earnings, cheap by its standards. It also offers a bit of recession-proofing, as demand for medicines tends to fall rather than rise in a downturn.

Vodafone

Telecoms giant Vodafone (LSE: VOD) is another company investors buy for dividend income rather than growth. And a good thing too, given that the Vodafone share price is currently about a third lower than it was five years ago.

It has recovered well since dipping in May, when new boss Nick Read cut its dividend by a whopping 40%. However, this looked a wise move to me given that the stock was yielding a ridiculous 10% at the time. 

Squeezing investor largesse gives Read the ammunition he needs to complete the group’s acquisition of Liberty Global‘s assets, and build 5G networks. Plans to sell 60,000 mobile masts should also help slash Vodafone’s debt pile.

The globally diversified group faces challenges in many of its markets, notably Spain and South Africa, while economic uncertainty is now plaguing its major European, Middle Eastern and African markets.

I expected the Vodafone share price to be cheaper given recent headwinds, as it now trades at 21.1 times forward earnings. However, with earnings expected to rise by a whopping 78% this year and 22% next, that valuation should rapidly fall.

The dividend yield of 4.9% is covered just once by earnings but looks safe for now. However, if I had to choose, Glaxo would be my first pick.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings. 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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