This FTSE 350 dividend stock is yielding 12%, but is it a buy?

Daniel Moore has been a eying dividend stock with a 12% yield for his portfolio, but can that level of performance be maintained over the long term?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Throughout the 2020 Covid-19 pandemic, retail investing and trading became a booming industry. In the low-interest and high fiscal stimulus environment, growth shares experienced euphoric levels of performance until rotations began to occur in early 2021. A dividend stock that capitalised on this retail expansion was CMC Markets (LSE: CMCX). CMC Markets operates a global leveraged (CFD) trading platform, as well as some non-leveraged brokerages services, geographically focused in Australia.

Success story

Prior to 2020, CMC had a very mediocre 2019. Turnover fell by 21.4% and pre-tax profit by 89.5% from £60.1m to just £6.3m. Things appeared to be on the decline for the business.

However, 2020 became, by a significant margin, their best year of trading to date. The combination of individuals’ cash sitting in essentially interest-free savings accounts, a lot of free time attributable to lockdowns and astonishing capital growth in technology companies fuelled a boom in retail trading globally. Pre-tax profit surged to £141.1m in the first half of its financial year to September 2020.

With skyrocketing fundamentals came incredible share price growth of more than 550% from April 2019 to April 2021. Things were certainly on the up. Consequently, the dividend paid to shareholders on 9 September 2021 of 21.43p per share was huge relative to the rest of the industry, at over 10%.

Growth becomes contraction

Due to the fact that CMC Market’s revenue is primarily derived from volatility within the financial markets, results fell slightly short in 2021, although they were still better than pre-pandemic levels.

The VIX (Volatility Index) cooled from a rating of 66 (very high) in March 2020 to just 20 at the beginning of 2021, indicating volume of trading within the financial markets was simmering down a notch compared with the pandemic-induced frenzy.

This direct correlation could be considered as an inherent risk of investing in a company like CMC, where returns will be influenced heavily by market conditions regardless of the firm’s individual successes. But in many ways, this can be said for the vast majority of listed organisations.

Looking to the future

Although CMC’s forecasted dividend payment has been reduced to just 3.50p, it has recently just launched a share buyback scheme of up to £30m. In addition to this the VIX index has risen over the past months to 32 due to the uncertainty regarding the global economic outcomes of Russia’s invasion of Ukraine. These events are unlikely to be a coincidence, and I suspect that CMC’s trading has been relatively strong as of late.

However, the retail investing landscape is not what it once was: inflation is biting the real disposable incomes of households that will surely be less willing to invest in a volatile market when they have large utility bills to pay.

For now, I’m going to sit on the fence regarding investment into CMC Markets, despite the lucrative operating margins and attractive dividend yields. I would think it wise to observe how the macroeconomic picture develops over the next month, particularly regarding the inflation metric determining real household income and just the general persistence of market volatility.

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.

Daniel Moore 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »