We all know the old saying ‘if it’s too good to be true it probably is’, but should believers in this adage steer clear of the whopping 8%+ yields on offer from Braemar Shipping Services (LSE: BMS) and contract for difference trading platform Plus 500 (LSE: PLUS)?
Shares of shipbroker Braemar now yield an enviable 8.64% due to a combination of steady dividend payouts and a 30% fall in share prices over the past year. Shares have reversed so dramatically because in the six months to September year-on-year revenue fell from £79.6m to £70.2m and underlying operating profit dropped from £7.1m to £1.4m.
The cause of this poor trading performance is down to depressed rates for cargo shipping and weakness in the oil and gas industry that led to lower demand for Braemar’s ship broking and consultancy services. But even after profits fell of the proverbial cliff the company maintained its interim dividend of 9p per share and analysts are expecting the full-year dividend of 26p to remain unchanged.
Of course, the question we must ask ourselves is whether or not this is sustainable. On this front there’s some cause to be positive, primarily because Braemar’s balance sheet could conceivably support a year or two of uncovered dividends. At the end of August the company had net cash of £0.7m and has access to a £30m revolving credit facility against annual dividend payments of around £7.6m.
Braemar’s relatively diversified revenue streams and asset-light business model would make it an intriguing bet by an investor who sees global trade or the offshore oil and gas industry bouncing back strongly in the coming years. Unfortunately this isn’t me, so I’ll be giving Braemar’s 8%-plus dividend yield a pass for now even though it appears management may be able to maintain solid dividend payments for the time being.
Share of spread betting operator Plus 500 now offer income-hungry investors an astounding 9.83% annual yield as the shares have plummeted over 40% since hitting highs in September. The cause of this precipitous drop is twofold. In late September the founders sold a cumulative £115m worth of stock and then, even more damaging, the FCA announced in early December that it intended to clampdown on the CFD market.
Insiders selling 13% of the company’s shares is certainly a red flag for investors, but it’s the possible FCA actions that worry me the most. Regulators have suggested they will implement a maximum margin ceiling CFD platforms can offer their retail clients, who can make highly leveraged bets on the movement of currencies, commodities and equities.
While it’s possible that the proposed regulations will be watered down, I fully expect regulators to score easy political points by cracking down on these platforms, especially since they say a full 82% of ‘traders’ end up losing money. Potential regulatory problems combined with very low barriers to entry for competitors, the company already being forced to increase advertising spend to draw in new customers and rising compliance costs mean I’ll be giving Plus 500 shares a wide, wide berth, despite their impressive yield.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.