These FTSE 100 dividend stocks yield 5% and 16%. Which would I buy for my ISA?

FTSE 100 dividend stocks are a great way to build wealth. However, a high yield doesn’t always make a good choice of investment, says this Fool.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 is back at lockdown levels. The truth is that it’s been slowly declining since June. This is great news for those of us looking for dividend shares to buy because these stocks are getting cheaper. However, it seems that for every company increasing its dividend, there’s another one issuing a profit warning. So we need to look carefully at those we buy.

Dividend stocks are a great way to build wealth for an ISA. The combination of tax-free returns and passive income is a potent combination for many income investors. Two Footsie dividend stocks that appear to me to offer good returns currently are pharmaceutical giant GlaxoSmithKline (LSE: GSK) and tobacco firm, Imperial Brands (LSE: IMB). But I’d only buy one of them.

A quality dividend stock: GlaxoSmithKline 

The hunt for a Covid-19 vaccine makes pharmaceutical firms a favourite for many income investors. In addition, the defensive nature of these stocks means they’re a good choice for difficult economic times since healthcare products are always in demand. Moreover, GSK has brand leaders in all of its markets, giving the firm a large advantage when compared with its peers. 

Offering a juicy dividend yield of 5.9%, and dividend cover of 1.5x earnings, Glaxo’s return is attractive and likely sustainable. However, I’d prefer a slightly higher dividend cover figure, around 2x for complete peace of mind. Notably, Glaxo didn’t cut its payout this year, unlike many other FTSE dividend favourites. 

Currently selling around 1,356p, Glaxo is trading at a good price, I feel. Indeed, some analysts have given the stock a fair value of around 1,800p. Consequently, I think this is a bargain price for a quality stock with a relatively impressive return.

Imperial Brands 

Big tobacco is often a preferred dividend stock to buy for many income investors. Selling around 1,244p at the time of writing, Imperial offers an outstanding trailing dividend yield of 16.6%! Amazingly, this is after recent cuts to its dividend, meaning that this eye-popping yield is a consequence of people selling the firm’s shares. 

And there’s a reason for that. Despite a reputation as a defensive stock, the tobacco industry has had its fair share of problems recently. Vaping was supposed to be an alternative market to tobacco, but in the large US  market, government regulation is impeding Imperial’s growth.

In addition, it has dividend cover of only 0.5x earnings and a large amount of debt on its balance sheet. This makes me wonder whether the dividend yield can be sustained. The headwinds facing the company may well prevent any potential for capital gains for a while too. Subsequently, I’m not adding Imperial to my ISA.          

Dividend stocks are a great way to build wealth, but the dividend needs to be sustainable. I think GSK offers this quality and I’ll happily increase my holdings. Imperial Brands, on the other hand, despite the crazy yield, is less attractive. I won’t be buying it because I think there are better opportunities for wealth-building out there. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rachael FitzGerald-Finch owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and 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.

More on Investing Articles

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »