3 big FTSE 250 dividends I’d definitely avoid right now

Do you like fat juicy dividends? Me too. But it’s important to look beyond the headline yield — a 4% dividend this year that’s progressive will serve you better than a 6% one that’s not sustainable. With that in mind, here are three big yields that I wouldn’t touch.

Retail woes

Debenhams (LSE: DEB) is expected to deliver a 6% dividend yield this year. But what if I told you that the predicted 3.4p per share is exactly the same as it was in 2013, and that back then it yielded just 3.2%?

Yes, the share price has slumped as earnings have been falling — from around 120p in late 2012, the price today stands at just 55p. From an EPS figure of 9.8p in 2012, forecasts suggest only 6.7p this year and 6.2p next (for falls of 14% and 9% respectively), and dividend cover will have dropped from three times to a mere 1.8 times by August 2018 if those prognostications prove accurate.

Debenhams’ 2016 results showed a 0.7% rise in revenue, but a falling gross margin led to a 2.2% fall in underlying EBITDA. Debt was reduced to £279m, but with a net debt/EBITDA ratio of 1.2 times, the company is still some way from its target of 0.5 times.

With more tough retail years ahead, I reckon Debenhams needs to cut its dividend — and investors should not rely on it.

Transport troubles

Rail and bus operator Stagecoach (LSE: SGC) has been pursuing a progressive dividend policy for years — from a 7.8p payment which yielded 3.1% in 2012, to a forecast 11.9p this year for 5.5% and on to 6% by 2019. The rises have been nicely beating inflation, but at the same time earnings have been stagnating and forecasts suggest three years of disappointing falls.

The share price has crashed in line, from 420p in summer 2015 to 216p, and that’s dropped the forward P/E to the 9-10 range and it has admittedly made the dividend look more attractive. But it’s no good if it’s not sustainable.

December’s interims showed a 17% fall in adjusted pre-tax profit and a 15% drop in adjusted EPS, while capital expenditure is rising as the company invests in new vehicles and technology. Stagecoach did say it is continuing with its progressive dividend policy, but added that it “will continue to regularly review its financial strategy and capital structure“.

With possible dividend pressure to come, I wouldn’t buy.

Eating out?

My third bargepole share for today is Restaurant Group (LSE:RTN), with its mooted dividend yields of around 5.3%. Earnings were rising up until 2015, but talk of coming challenges at results time in March gave the already-falling shares a hit — from levels close to 700p in December 2015, the price has plunged to 309p today.

Analysts have an EPS fall of 14% penciled-in for the year just ended, followed by a further 21% for 2017. There’s also a pause in dividend rises expected, which would drop cover this year to only 1.4 times. I think that’s getting a bit thin, and I’ll be looking for comments regarding dividends on 8 March when 2016 results are due.

Restaurant Group, which runs chains including Frankie & Benny’s and Gafunkel’s, is in a low-ish margin high-volume business, and it could be hit by reined-in discretionary spending over the next few years — we’re already seeing Brexit-driven inflation rising.

No, I wouldn’t buy any of these three for their dividends, not when there are better ones out there.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Stagecoach. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.