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These FTSE 100 dividend stocks yield up to 14%. I’d buy them in April

Today, I want to tell you about two FTSE 100 dividend stocks. With yields of 8% and 14%, they have excellent income credentials, on paper. And with single-digit earnings multiples, they also have the potential to deliver strong capital gains.

But will their earnings and dividends go up in puff of smoke, as so many other companies have warned in recent days? I think not. Here’s why I believe these businesses will be highly resilient through the Covid-19 lockdown. And why I believe they have more than a fighting chance of delivering their earnings and dividends.

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Classic defensive dividend stocks

Tobacco is one of the classic defensive industries. These are industries whose products tend to remain in demand, even if the wider economy is struggling. As such, the earnings and dividends of British American Tobacco (LSE: BATS) and Imperial Brands (LSE: IMB) have held up well through economic cycles.

The Covid-19 pandemic isn’t like anything we’ve seen in a hundred years, certainly in terms of scale and economic impact. However, I don’t think this alters the fundamental defensive strengths and investment appeal of BATS and IMB. Indeed, at their current depressed share prices, I see every reason to buy.

Bargain-basement valuations

I’ll come back to the performance of the businesses in the current economic climate. First, though, let me show you just how cheap the valuations of these two dividend stocks are.

At a current share price of 2,700p, BATS is trading at 8 times forecast earnings. IMB, at 1,475p, is at a multiple of 5.6. These ratings are far below their historical averages. They’re also at a significant discount to dividend stocks in the wider consumer staples sector.

Meanwhile, BATS’ forecast dividend yielding 8.2% is covered 1.5 times by forecast earnings. For IMB, the yield is 14.1% with cover at 1.3 times.

Back to business

Returning to business performance in the prevailing climate, IMB released a trading update today. It said: “There has been no material impact on group performance to date and current trading remains in-line with expectations.”

This is highly encouraging. It’s also consistent with previous virus outbreaks of MERS and SARS. There was no evidence of changes in underlying tobacco volumes in the affected countries during those outbreaks.

It’s possible the widespread lockdown under Covid-19 could actually increase consumption. Analysts at Jefferies point to studies showing links between boredom and smoking. And also the influences of stress, anxiety, and depression.

Safe dividend stocks?

There was also good news today on financing from both BATS and IMB. The former announced a $2.4bn bond issue, with maturity dates of 2027, 2030, and 2050. The latter announced a new a new £3.1bn revolving credit facility from a syndicate of 20 banks. It provides IMB with committed bank financing until March 2023, and replaces an existing £3bn facility.

It’s widely thought by City analysts that BATS is capable of maintaining its dividend this year. For example, it’s one of nine FTSE 100 dividend stocks that feature on a recent ‘safe’ list of 35 European dividend stocks put out by Morgan Stanley.

Most analysts also expect IMB to maintain its dividend, albeit acknowledging a higher risk of a cut. This is certainly true, but with the yield at 14%, even a rebasing of 50% would leave investors buying the shares today with a handsome level of income.

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