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Should you give up on Next plc and buy this 5%+ yielder instead?

The outlook for the UK retail sector is highly uncertain at the present time. Even before the EU referendum vote last year, Next (LSE: NXT) had warned of a hugely challenging year. UK consumers, it seems, were becoming less confident in their spending decisions, resulting in lower sales growth than expected.

Now that the UK faces Brexit, the pressure on shoppers is even higher. Although Next has a relatively high yield when special dividends are included, could another 5%+ yielding share be worth buying instead?

A difficult outlook

Perhaps the biggest problem facing Next is higher inflation. It is now above and beyond the rate of wage growth in the UK. Historically, this has meant that consumer spending comes under at least some degree of pressure. For example, during the credit crunch and in its aftermath, shoppers switched to lower-cost alternatives for a range of products and services. While Next has a relatively high degree of customer loyalty, it is not immune to such a shift in consumer spending patterns.

Dividend potential

Next has a dividend yield of around 3.6% at the present time. While this is less than the FTSE 100’s dividend yield of 3.8%, the company is in the midst of paying a special dividend of 45p per quarter. It has made three such payments, with a fourth expected to be paid in November. Including the 45p special dividend in its yield and annualising it means that the company has an overall yield of around 7.7%. This is one of the highest payouts in the index. However, there are no guarantees that special dividends will continue beyond the end of the current year.

Despite this, the company continues to have income appeal. Its ordinary dividend accounts for just 40% of profit, so the chances of further special dividends seem likely. In addition, it trades on a price-to-earnings (P/E) ratio of just 11, which is historically low for the stock. This suggests that the market has priced-in potential difficulties in the retail sector and has applied a wide margin of safety. This could present a buying opportunity and, while it may not be one of the most resilient dividend stocks around, its stunning yield appears to more than offset this risk.

Upbeat outlook

Also offering impressive income prospects is property investment company Kennedy Wilson Europe Real Estate (LSE: KWE). It invests in a range of property across the UK, Ireland, Spain and Italy, and released half-year results on Friday. Ahead of a merger with KWE, it was able to deliver £4.1m of incremental annualised income through a number of new leasing wins. Its liquidity levels remain high and it is on track to meet its £150m disposal target.

In terms of dividends, the company currently yields around 5% from a payout which is covered 1.2 times by profit. This suggests that there is scope for dividend growth potential – especially since monetary policy across Europe is likely to remain loose over the medium term. This should help to support property prices and allow Kennedy Wilson Europe Real Estate to generate an impressive level of financial performance.

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Peter Stephens 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.