2 dividend shares I’m running a mile from

Here are two dividend shares that could be in massive trouble with payout cuts lurking around the corner. Zaven Boyrazian investigates.

| 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.

Young Black woman looking concerned while in front of her laptop

Image source: Getty Images

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.

The London Stock Exchange is full of dividend shares that investors can leverage to generate passive income. And with the stock market going into a bit of a tailspin due to inflation, many of these firms are offering generous yields.

Even today, after enjoying a rally for the first half of 2024, there remains plenty of lucrative opportunities for investors to capitalise on. However, not all of these may prove to be winning investments.

Investors can behave irrationally when they start to panic. But in some cases, a mass sell-off may be justified. And looking at the market today, there are two dividend shares that I’m steering clear of.

Should you invest £1,000 in Barclays right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Barclays made the list?

See the 6 stocks

Energy infrastructure’s expensive

National Grid (LSE:NG.) has long been one of the most popular dividend shares to own. And it’s not difficult to understand why. The group’s raised its shareholder payouts for more than 25 consecutive years. And since demand for electrical infrastructure isn’t going to disappear any time soon, the firm seemed set to continue with this trend for many years to come.

Unfortunately for management, interest rates made a surprise comeback. With a highly leveraged balance sheet, the company quickly found itself in hot water. And management’s been forced to take drastic action in the form of the largest corporate restructuring seen in over a decade.

The plan is to invest £60bn by 2029 to re-spark growth into the business while simultaneously paying down debts. To achieve this, the firm’s selling off non-core assets as well as issuing new shares, raising £7bn. But most frustratingly for income investors, the dividend was also put on the chopping block, ending National Grid’s reign as a Dividend Aristocrat.

To management’s credit, if the group’s strategy’s successful, investors could start seeing double-digit growth re-emerge. And with more cash flowing to the bottom line, dividends may eventually make a comeback. However, corporate restructurings of this scale are pretty challenging to pull off with a lot of unknowns. Therefore, personally, even with a 4.7% yield, I’m not tempted to buy any shares today.

Addictive but restrictive

Another popular dividend share among those who don’t mind investing in tobacco companies is British American Tobacco (LSE:BATS). Unlike National Grid, this business has managed to retain its Aristocrat status despite offering a notably higher yield of 8.5%. What’s more, management intends to ramp up the return on investor capital even further next year.

However, it’s no secret that tobacco companies are facing increased pressure from regulators. That’s why most have started diversifying into seemingly healthier alternatives such as vaping. British American Tobacco’s no exception. But even these products are starting to get attention from regulators.

Ignoring this uncertainty, it seems that management may have also been a bit ambitious with its milestones since it now thinks it will miss its £5bn sales target for its non-combustible products by 2025. In the meantime, sales of traditional cigarettes are also trending downward, with combustible revenue falling by 10.1%.

All things considered, there’s just too much long-term uncertainty surrounding this business to warrant an investment today. At least, that’s what I think.

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »