The Motley Fool

Are these 6% FTSE 250 dividend yields beautiful bargains or value traps?

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.

Question mark made up of pound symbols
Image source: Getty Images.

Right now Dixons Carphone (LSE: DC), with its ultra-low earnings multiple and massive dividend yields, may appear the stock of dreams for investors.

But there is a reason why the electrical giant can be picked up for next to nothing. This was perfectly illustrated by last week’s shocking trading statement and while Dixons Carphone’s latest release may have prompted a fresh share price plunge, I think the business may still have much further to fall.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

It’s a classic bargain trap in my opinion, and here is why.

Problems set to persist

After advising that like-for-like revenues rose just 1% in its core marketplace of the UK and Ireland in the 12 months to April, the FTSE 250 business said that it expects trading to remain difficult for some time yet, predicting “further contraction” in its electrical markets at home as well as “market and contractual pressures” in the mobile segment.

As a consequence it expects pre-tax profit to register at £300m in fiscal 2019, down from about £382m in the period just passed.

Dixons Carphone’s pessimistic outlook is no surprise given the economic strains causing shoppers to put the block on buying new fridges, televisions et al, as well as delaying upgrades for their smartphones. Indeed, the business has issued two profit warnings in less than a year and it would come as no surprise to see further downgrades come down the pipe as the broader economic backdrop becomes tougher.

Forecasts not fearful enough

Yet these factors are not baked into broker forecasts right now. The City is predicting a 3% earnings rebound this year, a figure which creates Dixons Carphone’s dirt-cheap forward P/E ratio of 7.1 times.

And what’s more, the company’s muddy profits picture and large debt pile (predicted at £250m as of the close of April) also makes predictions of growing dividends in fiscal 2019 appear a bit of a stretch. After all, the firm kept the full-year payout locked at 11.25p per share last year. And so investors should take the forecast 11.6p dividend for the current year, and the subsequent 6.3% yield, with a large pinch of salt.

A better buy

Given the chances of earnings stress enduring long into the future I see little reason to invest in Dixons Carphone today despite its low valuation. While Greene King (LSE: GNK) isn’t immune to the same pressure on consumer spending, I think the pub and restaurant operator is in much better shape to ride out the storm.

City analysts are expecting earnings to fractionally decline in fiscal 2019, an improvement from the anticipated 12% fall forecast for the previous period. This seems like a realistic target, as customer service and quality improvements help trading to continue improving, and measures to scythe down the cost base pay off.

And in the longer term, I am convinced the brand conversions Greene King is making, coupled with the opening of new pubs across London and the South East, should pave the way for solid earnings growth once the trading landscape improves.

A forward P/E ratio of 9.3 times represents an attractive level at which to latch onto the pub play, in my opinion. And the predicted 33.5p per share dividend, which yields 5.8%, provides an extra sweetener.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Royston Wild has no position in any of the 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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.