Is Dixons Carphone worth buying for its massive dividend yield?

The market likes today’s figures from Dixons Carphone plc (LON:DC) but should income investors steer clear?

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Despite rallying in April and May, shares in electrical goods retailer Dixons Carphone (LSE: DC) are still down 15% since the start of the year.

On a longer timeline, the performance is even worse. Having peaked at 500p at the end of 2015, the company’s value has now fallen 70%. That’s a pretty brutal ride for loyal holders.

It would be wrong to say that there is one single cause for this. Political and economic uncertainty, consumers migrating online, stiff competition, poor execution by previous management: all have probably contributed.

This is not to say that Dixon Carphone has no appeal whatsoever. Based on analysts’ estimates, the stock yields a chunky 6.8% this year — five times as much as the best instant access Cash ISA (1.35%).

The question, however, is whether this payout is worth holding the shares for.

Despite today’s fairly pedestrian Q1 update (which is actually positive for a stock known lately for disappointing the market) I’m still inclined to respond in the negative.

Guidance maintained

Although like-for-like revenue in the UK and Ireland was flat, the company stated that it had maintained its leading position in both the electrical and mobile markets. Increased demand for TVs during the World Cup helped offset weaker sales of white goods and computers. And in phones, an expected reduction in post-pay was cushioned by “continued share gains in SIM Only and SIM Free”.

Performance overseas was also adequate. Flat like-for-like revenue in the Nordics was countered by a 9% increase in Greece with the company “strongly outperforming” the market. Also worth mentioning was the 13% rise in group online revenue over the period.

Perhaps most importantly, management guidance on full-year pre-tax profit was kept at £300m. Relatively new CEO Alex Baldock stated that “good progress” had also been made with regard to the company’s  “long-term direction”, adding that more would be revealed when the company announces its interim results in December.

Changing hands on a price-to-earnings (P/E) ratio of just 8, there’s arguably a margin of safety built into the shares already. Nevertheless, I’d continue to give the stock a wide berth, at least until management is able to convince the market that the company can thrive rather than simply survive going forwards.  

Best of bad bunch?

Finding a quality retailer with secure dividends in the bloodbath that is the high street right now isn’t easy. That said, I’d certainly be tempted to purchase a slice of clothing retailer Next (LSE: NXT) over Carphone Warehouse. 

That’s not to say the company is a screaming buy — I still have some concerns. Changing hands for a little under 13 times earnings, the stock isn’t cheap relative to peers. Moreover, Next operates in an equally competitive industry where household names must now contend with nimble, online-only operators. 

All that said, the company is probably one of the best of a troubled bunch. A strong management team continues to generate high returns on the capital it employs and free cashflow remains solid.

And while the dividend yield is a lot lower than that offered by the FTSE 250 constituent (a little less than 3%), it is expected to grow by 7% in the next financial year, in contrast to Carphone Warehouses’s relatively stagnant payout.

Should our forthcoming EU exit bring forth another bout of volatility, I know which stock I’d back to recover faster.

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.

Paul Summers has no position in any of the 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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