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One 6%+ dividend stock I’d buy and one I’d sell

UK retails sales fell in March by their biggest margin in seven years, according to the Office for National Statistics, with a fall of 1.7% from February and a quarterly fall of 1.4%.

Time to panic and sell high-street shares? Not a bit of it. For one thing, it was an almost inevitable outcome of the falling pound and rising prices. And when a sector is down, that’s the time to pick the best bargains and not the time to run away screaming.

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And, perhaps surprisingly, sales of textiles, clothing and footwear were actually up in the quarter. 

Tough times for some

But one I wouldn’t be buying now is Debenhams (LSE: DEB), despite its forecast dividend yield of 6.5%. Sure, at 51p the share price is down more 40% over the past two years and on a forward P/E of only around eight, but there are good reasons for that — not the least of which is two years of substantial EPS falls forecast.

And though there’s a big yield, that’s only down to the share price crash — it’s barely changed for years in cash terms. Debt at the interim stage of £217m (about a third of the company’s market cap) doesn’t thrill me either, especially not during an earnings downturn.

Part of the firm’s strategy for recovery is to become a destination for what it calls “Social Shopping“,  by offering exciting new experiences (among other things). But from what I see at the moment, that could be a tall order — my local Debenhams is as dull as ditchwater, and appears confused and cluttered.

There are going to be closures too, with a number of distribution and warehouse facilities getting the chop and up to 10 UK stores under closure review over five years. The turnaround plan might pull it out of the fire, but I can see that dividend coming under pressure.

Handling it well

Just down the road from Debenhams here is Next (LSE: NXT), which is vibrant, focused, and busier by comparison. Next shares are also down by 40% over two years, to 4,230p, but I see a very different outlook here.

Next has posted years of desirable earnings growth, and though the year to January 2017 turned out to be flat and there are small EPS drops on the cards for the next couple of years, we’re looking at a much better situation than Debenhams right now — and I think the slowdown represents nothing more than today’s Brexit-driven tighter belts.

The big attraction for me, and it’s a bit of a hidden one, is Next’s very attractive dividend policy. On ordinary dividends alone, a forecast yield of 3.7% is nothing to shout about, but Next has been topping it up with special dividends — and that is set to continue.

Next has a policy of returning surplus cash to investors through a combination of special dividends and share buybacks, and last year that more than doubled the ordinary dividend cash that was paid out. 

And in January 2017 the company announced a quarterly special dividend of 45p per share (and that was based on the lower end of expected cash flow, so it seems conservative). That 180p over 12 months would eclipse the 158p in ordinary dividends if they are kept unchanged, and we’d see a total yield of 8%.

That’s the one I’d go for.

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Alan Oscroft has no position in any 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.

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