Should you buy this near-10% dividend yield for your ISA in January?

Would adding this monster dividend yield to your Stocks and Shares ISA be a good idea, or is it built on shifting sands?

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Markets are in full risk-on mode this week as hopes of a US-Chinese trade deal grow and fears over conflict between Iran and the West recede. And there are several great stocks I’m tipping to really ignite in value in the coming sessions as they release latest financial updates.

I certainly wouldn’t encourage share pickers to pile into Halfords Group (LSE: HFD) in the run-up to the release of third-quarter numbers on January 22, however.

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The retailer’s share price has collapsed 58% over the past three years and continues to plunge from record low to fresh record low. It’s currently trading at 145p per share, and given the worsening state of the UK high street — retail sales on these shores fell for the first time in 25 years in 2019, according to the British Retail Consortium — I expect it to continue sinking.

Dropping down the gears

Halfords’ last update in November certainly spooked investors. This showed like-for-like sales dropping 2.4% in the six months to September. The company said that it saw “consumers delaying big-ticket discretionary purchases” in view of “economic and political uncertainty,” and it’s probable that sales of its expensive cycles and other high-priced goods will remain subdued as Brexit confusion likely persists throughout 2020.

It’s no surprise, therefore, that City analysts are forecasting another yet another drop in annual earnings for the full fiscal year to March 2020, this time to the tune of 15%. It’s worrying that they see no light at the end of the tunnel and they expect Halfords to see profits slide another 6% in fiscal 2021.

The retail play may be no stranger to bottom-line stress, but one thing has remained in its favour: its ability to keep its progressive dividend policy on track. Last time out it raised the total payout 3% to 18.57p per share thanks to its strong cash flows. However, the decision to freeze the interim payout at 3.18p per share in November has raised fears that its generous payout programme could be chucked in the dustbin.

And while Halfords continues to throw out boatloads of cash (free cash flow rose £10m in the first half to £44.2m), the number crunchers believe the dam could be about to break and the yearly payout fall.

Forget the 9.7% yield!

At present, a 14.1p per share dividend is tipped for financial 2020, a projection that yields a mighty 9.7%. This is an impressive yield and one that smashes the UK mid-cap average of 3.3% to smithereens. But I for one am not tempted, not only because of that poor long-term profits outlook, but also because the murky retail picture means an even larger payout cut could happen.

The broader market isn’t convinced by the City’s current dividend projections either, with Halfords’ low forward P/E ratio of below 7 times, combined with that yield, making the retailer look like one of those classic dividend traps. I reckon investors should avoid this particular stock at all costs.

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Royston Wild 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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