There’s no shortage of dividend stocks for me to choose from in the UK market, many of which are trading at low valuations. However, not every dirt-cheap option is worthy of investment, particularly in the current economic environment.
Bargain buy
FTSE 100 constituent Imperial Brands (LSE: IMB) is one example of a bargain dividend stock I’d be willing to buy. Placing ethical arguments to one side, it’s hard to contest the idea that tobacco companies can weather economic storms better than most due to the addictive nature of what they sell. This goes some way to explaining why Imperial’s valuation is up 25% over the last year and 15% in 2022.
Despite this, the stock still changes hands at price-to-earnings (P/E) ratio of seven. Yes, tobacco stocks will never trade at the same level as your typical tech company. Even so, this does feel very reasonable to me.
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Reliable dividend stock
The income stream looks great too. Analysts have Imperial returning 143p per share for the current financial year. Based on the price, as I type, this gives a monster dividend yield of 7.5%. Better still, this payout looks set to be very affordable for this cash-generative business, making a cut pretty unlikely.
Sure, there’s substantial regulatory risk here due to the damaging effects of smoking. However, this is exactly why only a few players dominate the industry. This rather odd advantage, combined with Imperial’s near-perfect record of increasing dividends on an annual basis, makes me think this could easily be a core holding in my portfolio.
Cheap for a reason
A second dividend stock that looks dirt-cheap right now is tech retailer Currys (LSE: CURY). However, this is one company whose shares I definitely won’t be buying.
Like most retailers, confidence has been dented by inflation. People simply don’t have the money to splurge on new things, especially shiny electronics. Naturally, a lot of this is already reflected in the share price. Currys has almost halved in value since the beginning of the year.
Worse to come?
The cost-of-living crisis looking like it will get even worse in the months ahead. As such, I think there could be more pain for those already invested. Moreover, I question management’s belief that Currys can ride out the storm better than rivals because of its scale and geographical/product diversification.
If people are able to put big-ticket purchases on hold, they will. And even if they can’t, the margins made by Currys in making a sale look woefully small to make this competitive edge feel pretty insignificant.
Out of interest, Currys is targeting adjusted pre-tax profit in the range of £130m-£150m for the full year. That’s significantly down from the £186m achieved in FY22/23.
Long-term focus
Perhaps I’m being harsh. The shares are certainly cheap, trading at a P/E of just six. A dividend yield of 5% isn’t to be sniffed at either. Similar to Imperial, it looks like it will be easily covered by profit.
But I’m a Fool. And a Fool thinks about owning stocks for years, not months. Am I that bullish about Currys’ earnings outlook (and, ultimately, its income credentials)?
The answer has to be a firm ‘no’ for me. I see nothing exceptional here to make the risk/reward trade-off sufficiently attractive.
