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Here are 2 top dividend stock picks I think are ESG-investing-friendly

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The need for companies to become more responsible on environmental and social measures has given rise to specific ESG investing. This rapid growth in demand by investors focuses on companies that are taking steps towards improving their impact on the environment, appropriate governance and social impact. As an investor, I think this is admirable. But what if I also want to target income from dividends as my investment aim? Here are two companies that I think combine the best of both worlds. My choices may surprise you!

Investing in a stock with an active ESG policy

One company I think works for me on both fronts is GlaxoSmithKline (LSE:GSK). My case for ESG investing is that the company is actively monitoring its own ESG strategy. It releases presentations specifically on this issue. 

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On the environmental side, it has the goal of having a net zero impact on climate and a net positive impact on nature by 2030. Socially, it’s aiming for 37% female representation in senior roles and recognition in global LGBT+ indices by 2022.

Aside from being ESG-friendly, in my opinion, the dividend yield is also very healthy. Currently it offers a yield just under 6%, almost double the FTSE 100 average yield. 

I think this dividend is sustainable. For 2020, profit after tax was £6.3bn with dividends of £3.bn, giving a healthy dividend cover of 1.6.

One risk to the stock is that Big Pharma traditionally isn’t favoured by ESG investors due to the perceived desire for profits over medical needs. As such, GSK may struggle to throw off this stigma. This would see investors dismiss the stock as an ESG pick and instead invest elsewhere.

An ESG-friendly tobacco firm?

The second company I think is a top dividend pick is British American Tobacco (LSE:BATS). You might think I’m crazy, wondering how I could invest in a tobacco company and say it’s an ESG-friendly firm. 

I do accept that initially it might not seem viable, but there are a lot of positives to look towards. The company is investing heavily in vaping and other e-cigarette products that studies have highlighted could be safer and less damaging than traditional cigarettes. This shift could be good for business (and dividends) as it is a growing area of the market to be moving towards.

The company is also doing well with projects such as Thrive. This helps farmers around the world manufacture in a more environmentally-friendly way. It also helps counteract issues such as child labour and helps pursue basic human rights.

On the dividend side, the current dividend yield is 8.04%. But admittedly, this has been helped by the share price falling almost 10% over the past year. Yet I think this could be a good buy if further action on ESG policy is taken.

Given the size of the ESG investing market, I think BATS can pursue an even more active policy and do more in this regard. As this gets more attention, I feel the share price could see a bounce-back.

The risk with buying BATS is whether the pivot to e-cigarettes is too late. We could see longer-term falling demand for cigarettes that would hurt the share price more than a more active ESG policy could counterbalance. And there’s also the issue that some may never see a tobacco firm in a positive light.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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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