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One 6% yield I’d invest in and one I’d avoid

For investors looking to live on income from investments, the dividend yield is a very important factor to consider when buying any share. Even for those not so concerned about income, high yields can reveal some unloved shares with the potential to bounce back strongly.

High yielder 

The most recent results from brewer and pub owner Marston’s (LSE: MARS) weren’t great. The FTSE 250 company revealed a drop in profit due to reducing the value of some of its properties.

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In the year to 28 September, underlying pre-tax profit fell to £101m from £104m from the year before, despite a small jump in revenue from £1.14bn to £1.17bn. The final dividend was maintained at 4.8p a share. Because of the football World Cup and a hot summer in 2018, the contrast between that year’s results and this year’s was particularly stark. 

There is reason for optimism, though, as the shares have generally performed well so far this year. The share price has risen 35%. The group is cutting debt and, following the acquisition of competitor Greene King, could well be a takeover target for a larger group. Worth around £850m, it may well be seen as cheap by some of its larger rivals. However, the post-election jump in the pound may put that off for a little while now. 

With the shares yielding 6% and trading on a price-to-earnings of 9, I think this high-yielding share could make income-focused investors wealthy over the long term.

In trouble

The retailer Card Factory (LSE: CARD) is operating in a tough market. Retailers from Jack Wills to Office Outlets to Debenhams have failed to survive the gloomy retail environment. Card Factory’s rival, Clintons, was bought out of administration this month, but I think the fact it went under casts a massive shadow over Card Factory.

Even the 6% dividend yield is not enough to tempt me to buy shares in this company. The plan to keep opening more stores, given the gloom on the high street, seems like entirely the wrong strategy. It will push up costs at a time when less people are visiting the shops. 

The website, where sales are growing at 16.2%, should be the priority for more investment. In the nine months to the end of October, group revenue grew 5%, up from 3.4% in the same period a year ago. Year to date, like-for-like sales were up 0.9% versus no growth in the same period in 2018.

To keep driving sales, Card Factory is reliant on selling ever more ancillary items such as wrapping paper, sticky tape, and gift boxes, but here it rubs up against much larger and cheaper rivals such as Amazon.

I don’t see many reasons to be optimistic about the Card Factory share price, and 2020 may well be a year in which the share price struggles – despite the tempting high-dividend yield.

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Andy Ross 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.