Every month, we ask our freelance writer investors to share their top ideas for dividend stocks to buy with you — here’s what they said for December!
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British American Tobacco
What it does: British American Tobacco manufactures and sells cigarettes, tobacco and other nicotine products.
By Harshil Patel: British American Tobacco (LSE:BATS) currently offers a 6.5% dividend yield. Having consistently paid dividends every year for over 25 years, I’m comfortable that this cash-generative business will be able to continue to do so over the coming years.
It’s a cheap and profitable business that achieved almost £10bn of free cash flow last year. Much of that has benefited shareholders through dividends and share buybacks.
I’d note that this industry is affected by tight regulation and high levels of taxations. Also, cigarette sales are slowly falling. That said, much of this is more than offset by higher prices. The end result for British American Tobacco is higher profit.
Looking forward, BAT is well placed to benefit from trends towards e-cigarettes. It expects this part of the business to reach £5bn in sales in the next three years.
Overall, these income shares still look attractive to me, and warrant an increase in my current position.
Harshil Patel owns shares in British American Tobacco.
Tritax Big Box REIT
What it does: Tritax Big Box REIT is a real estate company that invests in large-scale logistics warehouses and lets these out to retailers.
By Edward Sheldon, CFA. I have chosen Tritax Big Box REIT (LSE: BBOX) as my top income stock to buy this month. It currently offers a prospective dividend yield of around 4.5%.
One reason I like BBOX is that the company is well placed to benefit from the long-term growth of online shopping. Looking ahead, retailers are likely to need more access to strategically-located distribution warehouses as online sales increase.
Another reason is that the company’s warehouses are let out to blue-chip tenants such as Tesco, M&S, and Amazon. These kinds of tenants are quite defensive in nature. It’s unlikely that they would be unable to pay their rent.
It’s worth noting that Tritax sometimes needs to raise additional money from investors through share placings to expand its real estate portfolio. These can push its share price down temporarily.
I’m comfortable with this risk, though. That’s because these share placings ultimately fuel long-term growth.
Edward Sheldon owns shares in Tritax Big Box REIT and Amazon.
Airtel Africa
What it does: Airtel Africa provides telecoms and mobile money services primarily across East and West Africa.
By Royston Wild. The Airtel Africa (LSE:AAF) share price remains in the doldrums following half-year financials in late October.
As a value investor, I think this stock represents a top dip buying opportunity for me. Firstly, the telecoms firm’s current forward dividend yield of 4% beats the FTSE 100 average of 3.7%.
The yield gets markedly better over the next two years, too, as City analysts tip healthy dividend growth. Yields sit at 4.9% and 5.3% for the financial years to March 2024 and 2025 respectively.
Secondly, Airtel Africa trades on a rock-bottom prospective P/E ratio following recent share price weakness. It trades on a multiple of just 7.7 times.
I think the business is a great way to profit from soaring wealth levels in its 14 African markets. Revenues at constant currencies shot 16.9% higher in the six months to September, driven by strong growth across both its data and mobile money businesses.
I’d buy Airtel even though a strong US dollar is a threat to future profits.
Royston Wild does not own shares in Airtel Africa.
GSK
What it does: GSK is a healthcare business that offers medicines and vaccines that are used by patients worldwide.
By Charlie Keough. GSK (LSE: GSK) shares have, like many, been a victim of falling investor confidence. This year has seen the stock fall by over 14%. However, I think December could be the time to buy.
Despite the drop in share price, the business has posted some strong results in 2022. It raised its guidance in its half-year results. And when it updated investors with its Q3 results in early November, a continuation of this strong performance meant it raised it once again. It now expects growth in sales to come in between 8%-10%. With sales rising 9% in Q3, GSK looks like it’s fully on its way to achieving this.
On top of this, the stock also offers a substantial dividend yield of around 7%. With inflation continuing to surge in the UK, the passive income created from this offers me, to some degree, a hedge against inflation.
In the months ahead, the business may see its cost rise as inflation continues to spike. However, I’m still looking to potentially buy GSK stock in December.
Charlie Keough does not own shares in GSK.
Smurfit Kappa Group
What it does: Smurfit Kappa Group is a manufacturer of paper-based packing products operating in the UK, Europe, and America.
By Gabriel McKeown. In my opinion, Smurfit Kappa Group (LSE: SKG) is a prime example of an unlikely income stock, and this has led to the market neglecting the opportunity. This year has been challenging for Smurfit, with the stock price falling almost 25%. However, the underlying fundamentals remain attractive, with solid forecast earnings growth and reasonable profit margins.
Yet it is the dividend potential that drew my attention to the company, offering a current yield of 3.6%, which has been paid consistently for the last 11 years and has grown for the previous 10. Furthermore, this yield is forecast to grow by 14.5% next year, hitting 4%.
The recent sell-off in stock price has meant that the company has a P/E ratio of just 13. So when combining the strong fundamentals, with the dividend potential, I believe this could be a prime income opportunity.
Gabriel McKeown does not own shares in Smurfit Kappa Group.
XP Power
What it does: XP Power is a leading designer and manufacturer of specialist electronic components for numerous industries.
By Zaven Boyrazian. XP Power (LSE:XPP) is a specialist designer and manufacturer of electronic components critical to many devices. The group primarily focuses on supplying the healthcare, industrial, and semiconductor manufacturing industries.
In recent years, global supply chain disruptions have wreaked havoc on the group’s manufacturing lead times. Meanwhile, XP Power recently lost a legal battle over a competitor’s trade secrets which sent the share price down the drain.
However, according to its latest quarterly results, the underlying business remains financially robust, with order intake and revenue growing at an impressive pace.
Furthermore, the collapse in valuation has pushed the dividend yield to reach an attractive 4.6%. With order fulfilment slowly accelerating again, and the damage of the legal dispute already priced into the market capitalisation, XP Power stock looks like a lucrative long-term income buying opportunity for my portfolio.
Zaven Boyrazian owns shares in XP Power.
Polar Capital Holdings
What it does: Polar Capital Holdings plc is a specialist fund management company listed on the Alternative Investment Market (AIM).
By Paul Summers: My dividend pick for December is Polar Capital Management (LSE:POLR). Like other asset managers, Polar’s shares have plummeted in value in 2022 as investors have become fearful over rising prices, the Russia/Ukraine conflict, and just about everything else. This leaves the shares trading at 13 times earnings and yielding over 9% in the current financial year.
There’s clearly risk here. If things go from bad to worse, Polar could be forced to cut its payouts. As such, it goes without saying that I’d need to ensure that the rest of my portfolio is sufficiently diversified away from this industry before taking the plunge.
Then again, it’s worth noting that the interim dividend was maintained in November’s half-year numbers. That’s despite the company seeing a significant but arguably expected reduction in pre-tax profit. This gives me confidence that Polar’s income stream will emerge from the storm unscathed.
Paul Summers has no position in Polar Capital Management.
Dunelm
What it does: Dunelm is a homewares retailer serving the British market through a network of stores and online
By Christopher Ruane. In the past few months I have been buying Dunelm (LSE: DNLM) stock. Even after rising lately, the shares are 27% cheaper than they were a year ago.
I do see a risk that people having less spare cash could lead to falling sales at the chain. But I see long-term potential in the well-run business, which is highly cash generative. Last year Dunelm generated £153m of free cash flow, helping fund around £75m in ordinary dividends.
The company also paid a generous special dividend. If business is tougher this year, there may be no special dividend. But the ordinary dividend yield is already 4%, which I see as attractive. It was covered twice over by earnings last year.
In the long term I am also optimistic there may be more special dividends to come. Dunelm is an income-generating machine. I’d buy more of its shares this December if I had spare cash to invest.
Christopher Ruane owns shares in Dunelm.
Primary Health Properties
What it does: Primary Health Properties is a leading investor in modern primary healthcare facilities in the UK and Ireland, with the majority of rental income underpinned by government bodies.
By G A Chester. Primary Health Properties (LSE: PHP) has attractive qualities for dividend investors. Long leases, with rental income backed by the NHS (and the HSE in Ireland), make for predictable cash flows to support growing dividends. In fact, PHP has just delivered a 26th consecutive annual increase.
Historically, investors have been willing to pay a premium to the company’s net asset value (NAV) and accept a sub-5% — and at times sub-4% — dividend yield.
However, at a recent share price of 116p, the stock is at a 4% discount to last reported NAV of 120.8p. And with quarterly dividends totalling 6.5p, the running yield is 5.6%. Furthermore, for buyers of the shares today, the prospective yield is 5.9% on expectations (if met) of an increased payout to 6.8p in 2023.
A radical change in government policy curtailing private sector involvement in the NHS would hurt PHP, but I think this is a low risk.
G A Chester does not own shares in Primary Health Properties.
Taylor Wimpey
What it does: Taylor Wimpey is one of the UK’s biggest housebuilders and has a rather big exposure to most regions of the country.
By John Choong. Taylor Wimpey (LSE: TW) shares have lost almost half their value this year due to fears of a house market crash with sky-high mortgage rates. As such, the housebuilder has seen its order book shrink and cancellations tick up.
Despite that, its position as an income stock for my portfolio remains lucrative as management is yet to rebase its dividend. The strength of its balance sheet allows it to cover its current dividend yield of 8.8%, twice. Therefore, I’m only expecting a small cut to its dividend in the near term.
Most importantly, however, I think its share price may have bottomed. With the Bank of England set to pause its rate hikes soon, mortgage rates may have hit a peak. This could ease the downward pressure on house prices and allow me to capitalise on a rebound in the medium term. Not to mention, Deutsche rates the stock a ‘buy’ with a price target of £1.15.
John Choong has no position in Taylor Wimpey.
National Grid
What it does: National Grid owns and operates energy transmission and distribution networks in the UK and US and is the electricity system operator across the UK.
By James J. McCombie: National Grid (LSE: NG) shares offer a dividend yield of 5.1%. The company has consistently increased its payments to shareholders every year since at least 2000, making it a true dividend aristocrat.
As a utility company, National Grid is unavoidably asset-heavy. Building and maintaining those assets is expensive and has resulted in relatively high debt levels. For example, connecting new renewable sources to the grid might cost £35bn over the next three years. The business is also highly regulated. There are profit caps and potential windfall taxes, and the scrutiny makes deals and growth challenging.
However, it is heavily regulated precisely because of its privileged position. At the heart of the UK’s energy industry, it enjoys pretty steady and predictable cash flows and revenues that should closely track inflation, making increasing dividend payments a more straightforward task than most other companies.
James J. McCombie does own shares in National Grid.
BP plc 8% Cum 1st Prf
What it does: BP is one of the major oil companies that finds, extracts, refines, and supplies oil products.
By Stephen Wright. My dividend stock of choice for December is BP plc 8% Cum 1st Prf shares. I think that the stock offers a steady return that is attractive at today’s prices.
I’ve opted for the preferred shares over the common equity for two reasons. First, I think that the price of oil is uncertain at the moment. Second, I think that the preferred stock trades at an attractive price.
Unlike the common equity, the preferred shares pay a fixed dividend. That means that even if BP’s profits drop, an owner of the preferred stock will still receive the same dividend (unless the company suspends its dividend entirely).
At today’s prices, that return amounts to an annual return of over 5%. To me, that looks attractive compared to the returns on offer elsewhere on the UK stock market. That’s why I’d look to buy it as my dividend stock for December.
Stephen Wright owns shares in BP plc 8% Cum 1st Prf
