2 dividend stocks that could decimate your shares portfolio

Royston Wild looks at two dividend stocks where the risks outweigh the possible rewards.

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Home improvement play Topps Tiles (LSE: TPT) has taken a pasting in Tuesday trade following the release of less-than-reassuring financials, the stock last 9% lower from the prior close.

Topps Tiles announced that sales during the 26 weeks to April 1 clocked in at £106.5m, falling fractionally from £108m in the corresponding period a year earlier.

On a like-for-like basis the tiler saw sales slump 1.9%, a marked departure from the 4.7% rise enjoyed during the same six months last year.

And conditions are becoming tougher for Topps, a 4.1% fall in second-quarter like-for-like sales moving away from the 0.3% rise printed in quarter one.

Sales topple

The retailer commented that “trading in the second quarter reflected softer market conditions and the group is also reporting against a stronger period from the prior year when housing transactions accelerated ahead of the Stamp Duty changes in April 2016.”

In slightly-sunnier news however, it added that “based on an improving trend across the second quarter and a prudent view of the second half, management expectations for full-year profits are within the current range of analyst forecasts.”

The business is anticipated to print underlying pre-tax profit of £21m-£22.3m during the year to September 2017.

Sure, it has been bashed by the impact of tough comparatives from the same period of fiscal 2016. But this does not disguise the fact that retail conditions are becoming more difficult for many retailers, with galloping inflation and economic uncertainty causing shoppers to tighten their pursestrings.

As a consequence, hopes that a recent trading improvement at the firm will translate into actual and sustained revenues growth is an ask too far, in my opinion.

The City expects robust earnings growth at Topps to grind to a halt in the current fiscal period, and a fractional decline is currently pencilled-in. However, analysts predict it to get back to winning ways with a 6% advance in 2018.

I believe these forecasts are way too optimistic however, and that profits could take a much bigger hit than currently expected. So while retail indicators remain less-than-assuring, I reckon investors should give little attention to Topps Tiles’ chunky 4.3% dividend yield.

Brexit bothers

A deteriorating trading outlook would also encourage me to stay well clear of Capita Group (LSE: CPI).

The support services provider is suffering as businesses defer investment decisions in anticipation of Brexit-related pain intensifying in the months and weeks ahead. Capita noted just last month that “the headwinds we faced in the second half of 2016 will affect trading performance in the first half of 2017,” and added that it does not expect to return to growth until 2018 at the earliest.

Like Topps Tiles, Capita also boasts a chunky dividend yield for the current year, on this occasion a market-mashing 5.7%. And glass-half-full investors may also be encouraged by a predicted 4% earnings rebound in 2018 (following an anticipated 3% decline this year).

I for one would not be tempted in however, given the sickly state of Capita’s end markets and uncertainty over the timing of any recovery.

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.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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