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2 high-paying dividend stocks on AIM: a risk or a reward?

The AIM financial index is often described as the Wild West of the investing arena. With good reason too. Every year, shareholders can lose thousands of pounds on AIM and some of its constituents go bust. So are there any contenders worth investing in?

Two big dividend payers on AIM are Shoe Zone (LSE:SHOE) and Highland Gold Mining (LSE:HGM). Let’s take a closer look at their financial outlook. 

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One step forward, two steps back

Shoe Zone appears on many British high streets. It’s a warehouse-style store filled with cheap and cheerful shoes for all the family.

The Shoe Zone share price is up 12% year-to-date. This could, in part, be thanks to the ‘Boris bounce’, which has boosted many high street retailers after the Conservative election win in December.

It employs over 4,000 people in over 500 stores throughout the UK and Ireland. Shoe Zone has a £90m market cap, and its price-to-earnings ratio (P/E) is 16, but its earnings per share have fallen to 11.4p from 19p in 2018.

In January it reported a rise in full-year revenue, but profits fell because of price hikes in British business rates.

Its dividend yield is an attractive 6% but I’m not convinced it’s worth the risk. Unfortunately, this is another British retailer at the mercy of high business rates and decreased footfall. 

Shining bright

With gold prices heading north, it may tempt you to invest in a gold mining company.

Highland Gold Mining is an AIM-listed stock with a £766m market cap. It offers a 5% dividend yield, while it’s P/E is 11 and earnings per share are 19p.

It’s worth noting that its dividend cover is less than 1, which is not ideal. This means the dividend could be at risk of a future cut.

Prior to December, Highland Gold was selling its gold to commercial banks. Now it’s become a producer on the MOEX Precious Metals Market in Moscow. It’s the first gold producer to do so and it means an additional income stream through this supplementary market.

Highland’s total gold production through the first nine months of 2019 increased by 7% compared to the same period in 2018.

The share price is up nearly 30% in the past year, but it’s a volatile stock to own. With gold prices as high as they are, I’d be concerned of a pull-back if the gold price goes into decline. I think this is too risky for me.

AIM: on target?

AIM shares are listed on the London Stock Exchange, just like the FTSE 350 companies. AIM shares are much riskier than FTSE shares because there is usually less liquidity in the market.  This means they can be difficult to sell quickly. 

Choosing AIM stocks with a dividend is a good strategy in theory, because the dividend yield brings additional returns to your investment, helping to offset any associated risk. As much as I love both gold and shoes, I think we can find safer share purchases, with attractive dividend yields, among the FTSE 350 stocks. 

I like that both these companies have been established for a while. However, they each have very low dividend cover and a volatile share price history. They’re not for me. 

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Kirsteen 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.