These dividend stocks yield up to 8%! Are they brilliant ISA buys or investment traps?

Should you buy these high-risk firms and their dividends for your ISA? Royston Wild gives the lowdown.

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I love big dividends but won’t be spending my hard-earned cash on N Brown Group (LSE: BWNG). This is a share with 7%-plus dividend yields, but one that I consider to be an investment trap given the worsening retail conditions in the UK.

There’s been no stop to the amount of worrying data coming out of the retail sector. Insolvency specialists Begbies Traynor are the latest to illustrate just how tough conditions are. It says the number of retailers in “significant distress” in the fourth quarter rose 2% annually to 31,615.

Retailers in trouble

And it’s not just bricks-and-mortar businesses that are struggling either. Apparently the number of online retailers in severe financial straits leapt 8% year on year in the period. So much for N Brown’s decision to abandon physical stores and trade solely online, then.

I don’t care about the firm’s cheapness. It trades on a forward price-to-earnings ratio of just 4.5 times and boasts a bulky 7.9% dividend yield, too. N Brown’s a share that carries far too much risk right now.

The tough retail conditions are playing havoc with those retailers at the budget end of the market, too. You’d think that operators like Card Factory (LSE: CARD) would thrive in the current conditions.

Greetings cards and related paraphernalia are always in demand regardless of broader economic conditions, right? And the likes of Card Factory should be capitalising on the tough environment as shoppers switch down from more expensive operators like Clintons and WH Smith, no? Well Card Factory’s latest trading release showed that such notions are hopelessly wide of the mark.

Profits keep sinking

Adjusted underlying earnings for this year (the period ending January 2020) will fall again, it said earlier this month. A reading of between £81m and £83m is expected, down from £89.4m in financial 2019. In the 11 months to December, like-for-like sales had fallen 0.6%, worsening from the 0.1% fall seen a year earlier. And online sales are cooling at an alarming rate, too – up 14.8% in the period to December versus 59.1% in the corresponding 2019 period.

City analysts expect Card Factory’s woes to persist for much longer, too. Like over at N Brown, they expect earnings to drop in the next financial year as well. I for one am not confident that profits at either small cap will rebound any time soon, either, even if consumer confidence has perked up more recently.

According to PwC, consumer sentiment has just hit its highest level for five years (at +3) thanks to what it says is a mix of “real wage growth, low interest rates, and political change.” But with Brexit tension threatening to explode later this year I fear that this could be just a flash in the pan. This is why, despite Card Factory’s low forward P/E ratio of 6.5 times and 8% corresponding dividend yield, I’m happy to give it, like N Brown, a wide berth.

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 of the shares mentioned. The Motley Fool UK owns shares of Card Factory. The Motley Fool UK has recommended WH Smith. 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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