2 big-dividend stocks that could send you to the poorhouse

Despite their big dividend payouts, I’m avoiding these two and here’s why.

 

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Integrated services and construction company Kier Group (LSE: KIE) delivered full-year results this morning that the market seems to like, with the shares up almost 7% as I write. But if you’d held them since the beginning of 2014, you’d still be nursing a 38% capital loss on your investment.

Good figures, but…

The underlying figures look good with revenue ticking up 5% and earnings per share moving 7% higher. The directors pushed up the full-year dividend by 5% reflecting the board’s confidence in the group’s prospects”.

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However, I’m wary of construction companies as a breed.  We’ve seen in other firms with construction operations, such as Galliford Try recently, that it can be hard for them to stay consistently profitable. There’s always the potential for a firm like Kier to mess up in the tendering process or during the execution of a project. So I’m inclined to ask why take the risk by investing in the sector at all?

Kier says that its two-year simplification programme is “substantially complete”. The weakness in the price of the stock over the past three years or so was not without reason. The company needed to reshape operations to stand any chance of growth and there’s a £75m charge against reported profits relating to the closure of operations in Hong Kong and the Caribbean, and following the sale of Mouchel Consulting.

Big revenues, small profits

A little under 50% of revenue came from the construction division and 40% from services such as strategic asset management, housing maintenance, facilities management, environmental services, refuse collection, recycling, highways maintenance, street lighting, fleet services, waterways management, and energy solutions provision. The Construction and Services order books stand at around £9.5bn providing “good long-term visibility of future workload”.

The directors say they are Confident of achieving double-digit profit growth in FY18,” but I reckon the big revenue numbers involved in the construction and services operations, and the relatively small numbers for profit in those two divisions, don’t leave much room for error. So, I’m avoiding the shares.

Sudden downturn

Meanwhile, Safestyle UK (LSE: SFE) also appears to have delighted the market today with its interim results. The shares are up around 8% as I write. But I reckon the market’s reaction could be one of relief that trading for the double-glazing and door installer is not as bad as feared, rather than joy that the business is growing. After all, even at today’s 200p, the shares are down around 37% since May.

In the face of a sudden downturn in the market, which the company reckons is the severest since 2008/09, the firm managed to grow revenue by 1.4% compared to a year ago. But the progress came at the expense of margins with underlying profit, before tax, plunging a little over 15%. The directors held tight by declaring a flat interim dividend. At least there’s no cut in the payout – yet.

Safestyle has just demonstrated its reliance on buoyant economic conditions to thrive. If the economy plunges, Safestyle could have much further to fall and doesn’t square up as the kind of secure dividend investment I’m looking for.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Safestyle UK. 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.

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 considered, so you should consider taking independent financial advice.

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