The Motley Fool

Dividend investing! Should I buy or avoid these 7% and 9% dividend yields?

These dividend stocks offer yields that smash the forward average of 4.5% currently sported by UK-quoted companies. But do they appear too good to be true?

Risky business

Investing in the retail sector is incredibly risky business at the moment, and with this in mind I think that Card Factory (LSE: CARD) is a share best avoided at the current time.

Latest financials showed that not even budget operators like this firm, which sells greetings cards, gifts and party-related paraphernalia, are immune to the mounting pressure on consumer spending power. Like-for-like sales at the business dropped 0.1% in the 12 months to January, swinging from the 2.9% rise printed in the previous year, and as a consequence, underlying pre-tax profit reversed 7.3% to £74.6m.

But Card Factory’s sales were also struck by “poor high street footfall,” a phenomenon which threatens to worsen as shoppers continue to swap bricks and mortar stores for shopping online.

Dividends in trouble?

In a reflection of these tough conditions, the FTSE 250 retailer elected to keep the full-year dividend on hold at 9.3p per share for fiscal 2019. And while it supplemented this reward with another special dividend, the tasty 5p per share bonus for last year shrank markedly from the 15p payout delivered in the prior period.

So what are City analysts forecasting for the current year? They’re anticipating another special dividend, albeit at a reduced rate again, and as such, a 13.8p per share total dividend is tipped. Consequently investors can dial into a chunky 7.1% yield.

In my opinion, though, this prediction looks a bit too good to be true — it is covered just 1.3 times by estimated earnings, some way below the widely-regarded security watermark of 2 times.

While Card Factory’s low net debt-to-underlying EBITDA remains low at around 1.6 times, and could give it the flexibility to keep paying special dividends this year, signs that the business faces prolonged strain at the checkout beyond the medium term could well cause it to wind in its ultra-generous payout policy sooner rather than later. And the stream of scary retail surveys in recent months makes this a very real possibility, in my opinion.

This 9%-yielder is a better selection

Rather than splashing the cash on that risk-heavy stock, I’d prefer to buy into Bovis Homes Group (LSE: BVS).

Dividend coverage for 2019 sits at 1.1 times, but in all other respects it appears to be a superior dividend stock to Card Factory. Like its FTSE 250 compatriot, it is also minded to dole out special payments, and right now City analysts are predicting a 102.2p per share reward. This projection yields a stonking 9.1%, soaring above that of the bedraggled retailer.

Bovis Homes certainly appears to have the financial strength to meet this estimate, the housebuilder having £126.8m of net cash on the books. And the condition of the housing market, with the chronic homes shortage that will take many years to solve, suggests that profits should keep rising in the near term and beyond, providing the base for those dividends to keep rising long into the future too. If you’re looking to load up on white-hot income shares I believe that this construction star is worthy of some serious attention.

Stock-Market Millionaire

Full of Foolish wisdom, the free Special Free Report “10 Steps To Making A Million In The Market” lays out what we consider vital advice that can help create a possible £1 million portfolio!

Take Step 6, for instance - Harness The Full Power Of Reinvested Dividends. While these cash payments may initially be small in relation to the capital value of the investment, reinvesting them into yet more shares can dramatically enhance your portfolio’s return!

To see the jaw-dropping example we use to back up our case, as well as access to the remaining nine steps, click here to get your copy free of charge.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of Card Factory. 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.