It’s very easy for dividend hunters to be seduced by yield at the expense of everything else.
With brokers expecting shareholder payouts to hit new all-time highs in 2019, some of the yields out there are truly staggering. However, scratch a little deeper and many of the London stock market’s yield heroes turn from income stars to shocking investment traps.
So which category do the following shares fall into, and should you buy or sell them today?
Build a fortune
Bovis Homes Group is a share whose price has tracked lower in recent weeks, though I remain unperturbed by its trading outlook for the near term and beyond.
Don’t worry about Brexit, I say, fears over which have caused a pullback among all of the country’s listed homebuilders of late. Demand from first-time buyers is going from strength to strength because of favourable lending conditions, a point illustrated by recent Rightmove data showing prices of newly-listed properties hit £309,348 hit this month, less than £100 off the record highs hit in June 2018.
No wonder City analysts expect Bovis to keep growing profits and dividends. And happily for the current fiscal year, this creates a big 10.2% payout yield. It’s a cast-iron buy in my book.
I certainly wouldn’t want to throw any of my hard-earned cash at N Brown. Fresh financials released last week, in which the retailer advised that revenues fell 3.8% in the last quarter, show just how much pressure it’s under to avoid capsizing.
Indeed, fresh retail data that the Confederation of British Industry released yesterday, showed total June sales in the UK saw their biggest year-on-year fall since the depth of the financial crisis a decade ago, suggesting that things could be about to get really ugly at N Brown and also at many of its competitors in the clothing arena.
So I would avoid the share at all costs, in spite of its 11.4% forward dividend yields. In fact, I would be tempted to sell given the share price strength it has shown in recent months before things turn south again.
Not photogenic right now
Should investors take their cash and plough it into Photo-Me International instead, then? Dividend yields here sit at a chunky 9% for the current year, exactly twice the forward average of 4.5% carried by the FTSE 100.
There’s plenty to get excited about as the business, which operates photo booths and launderettes, aggressively expands its operations across Mainland Europe and Japan. That said, there’s a lot to be concerned about too as Brexit pressures in the UK and Ireland persist. Revenues in Photo-Me’s home marketplace tanked 18% in the six months to October as a result, and the onset of more challenging conditions in the latter half of the fiscal year resulted in a shock profit warning in April as well.
So forget about those monster yields, I say. I’d happily sell out of Photo-Me today to buy some of the other brilliant big yielders currently out there.
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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.