MENU

One 9% dividend I’d buy more of, and one I’d dump as quickly as possible

Shares in Low & Bonar (LSE: LWB) have had a dire couple of years, losing 80% of their value since a peak in the summer of 2017.

That includes a 10% drop on Wednesday after the company, which makes “advanced, high-performance materials from polymer-based yarns and fibres,” revealed it’s up against its banking covenant limits and needs to raise some new cash.

To that end, the firm is tapping the market for a £54m top-up in the form of a big new share issue. The offer will be at 15p per share, a discount of 17% on Tuesday’s closing mid-price, and that quickly led to an 11% drop by midday Wednesday, to 16p.

Cash problems

Chief executive Philip de Klerk said: “Over recent years, not enough was invested in some of the Group’s key manufacturing sites, a failed strategy to expand in Civil Engineering was pursued, and there was insufficient focus on cost and cash.”

The actual results took a bit of a back seat to the new funding plan, revealing a statutory pre-tax loss of £42.2m, more than twice last year’s loss. On an underlying basis, pre-tax profit came in 45.6% down at £16.7m, with underlying EPS falling 44.5% to 3.56p.

One of the key redeeming features of an investment in Low & Bonar over the past year has been its dividend. But that’s been slashed by more than half, from 3.05p per share to 1.42p. Too little, too late, in my view.

On today’s depressed share price, that still represents a yield of nearly 9%. I maintain my insistence that paying out big dividends while desperately short of cash is bad management, and a company that does so won’t see a penny of my investment pot.

I’d buy this one

When I rate a share as a buy but don’t buy any myself, I’m sometimes asked why? The simple answer is that I just don’t have enough cash to invest in every company I’m bullish about. I think there are many great big-dividend bargains out there now, especially in our undervalued FTSE 100. But my finances are, alas, not unlimited.

But one contrarian high-dividend stock I have bought is house-builder Persimmon (LSE: PSN).

Persimmon is forecast to provide dividend yields of 9.8% for this year and the next two, and I explained recently why it got the nod for some of my retirement cash.

We do, however, need to put those mooted 9.8% yields into perspective, as they include a big portion of special dividends as the company returns surplus capital to shareholders.

Cash cows

But even without that extra cash, ordinary dividends are expected to yield around 5.5% over the longer term, and I see that as one of the best long-term cash streams the FTSE 100 has to offer.

Mired in a long-term housing shortage as we are, I think the same about our other top house-builders. Taylor Wimpey shares are offering dividend yields of more than 10%, with Barratt Developments on forecast yields of around 8.5%. And we’re looking at three companies on P/E multiples of only around eight.

I know I’ve been banging on about these house-builder stocks being cheap for some time, but I do find their low valuations impossible to justify. And at least I’ve put my money where my mouth is.

Want To Boost Your Savings?

Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.

The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?

Alan Oscroft owns shares of Persimmon. 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.