2 UK shares I wish DIDN’T pay dividends

UK dividend shares can be a great source of passive income. But sometimes, the best thing for a company to do with its cash isn’t to pay it out to investors.

| 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 Asian woman with head in hands at her desk

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 UK has some great shares for passive income investors to consider buying. But distributing cash to investors isn’t always the right thing for a company to do. 

Sometimes, a business can use its cash in a way that significantly improves its long-term outlook. And in that situation, it’s best for investors if it doesn’t pay it out as a dividend.

Forterra

One example is Forterra (LSE:FORT), which I used to hold. The stock has a dividend yield of 1.66%, but I don’t think it should be sending cash out to shareholders at the moment.

Should you invest £1,000 in HSBC 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 HSBC made the list?

See the 6 stocks

The company’s a brick manufacturer and – understandably – has been finding a weak housing market’s bad for business. And this has been showing up on the firm’s balance sheet.

At the end of 2022, net debt was £24m, but this jumped to £117m at the start of 2023 and reached £123m by the end of June. And that’s a lot for a business like Forterra.

For context, the company’s operating income in 2022 – its best year in the last decade – was £72m. So I think it will be a while until the firm’s able to get its balance sheet to 2022 levels.

Given this, I’d rather see Forterra reducing its debt than sending out cash to shareholders. The dividend has been cut substantially, but I’d prefer to have seen it suspended entirely.

The company’s in a cyclical downturn and things are likely to improve by themselves. But paying dividends with debt levels growing substantially isn’t something I like the look of.

Dowlais

Unlike Forterra, I still own shares in Dowlais (LSE:DWL). And despite a pretty attractive dividend yield of almost 8%, I think the company has better uses for its cash. 

The FTSE 250 manufacturer also has a lot of debt on its balance sheet. But it’s planning to sell off one of its divisions, so the cash from that could be used to strengthen the financial position.

Right now though, I think Dowlais shares are incredibly cheap. And that means I’d rather the firm used its excess cash for share buybacks, rather than dividends. 

If the share price stays where it is (or anywhere near it) I’m expecting to reinvest the next dividend I receive. At today’s prices, I’d like to own more of the company. 

But it’s more efficient for this to happen by Dowlais buying out other shareholders. And in fairness, the company has been doing this over the last few weeks and months. 

From my perspective, buybacks make a lot more sense for investors with the stock at its current levels. So I’d rather see the cash go there. 

Long-term investing

Sometimes, the best thing for a company to do with its cash is return it to shareholders as dividends. But this isn’t always the case.

When a business has a better opportunity, I want to see management taking it. Ultimately, that’s what is going to determine the success of my investment.

In the right circumstances, I’m very happy to do without dividends in the short term if it means I’ll get more in the future. That is – after all – what investing is all about.

But there are other promising opportunities in the stock market right now. In fact, here are:

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

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.

Stephen Wright has positions in Dowlais Group Plc. 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

artificial intelligence investing algorithms
Investing Articles

Up 272% in just a year, is Palantir stock just getting started?

This writer recognises that Palantir has grown its business very well -- but does the stock price offer him an…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Up 50%? The Aston Martin share price forecast is mind-blowing! 

If analysts are right, the Aston Aston Martin share price could absolutely rocket in the year ahead. Harvey Jones says…

Read more »

Investing Articles

As the S&P 500 drops, here are 2 Stocks and Shares ISA holdings I’m watching

Our writer has different views on how President Trump's tariffs might affect these two US holdings in his Stocks and…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

£10,000 invested in Tesla stock at Christmas is now worth…

Tesla stock has been one of best-performing investments of the past decade. But things haven't gone to plan for investors…

Read more »

Investing Articles

Up 279% in 5 years, could Meta stock keep soaring?

Meta stock has more than tripled in five years. This writer sees lots to like about the business but also…

Read more »

Pink 3D image of the numbers '2025' growing in size
Investing Articles

25% total return in a year? Is now the perfect time to buy BP shares?

BP shares are on the front line of today's global economic and political uncertainty but analysts think they can still…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Investing Articles

These FTSE 100 dividend shares just got cheaper, thanks to President Trump!

Investors buying dividend shares can lock in bigger long-term yields when share prices take a tumble. These two just did…

Read more »