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I like a good dividend like many other investors. In this regard, the UK market can be more attractive than its US cousin. Even blue-chip FTSE 100 again FTSE 250 stocks with the highest dividend yield.
Why is that?
Earnings prospects have been reduced
One reason could be that the company expects to perform less well in the future than it does now.
That helps explain why the FTSE 100 shares tobacco Imperial Brands again British American cigars both yielded above the index average of 3.0%, at 5.6% and 5.7% respectively.
A decline in the price of tobacco sales can hurt sales revenue and profits. Indeed, both companies have reported declining revenues for several years in a row.
Avoided sectors
Sometimes, investors avoid a certain business sector. With fewer stock buyers, that can help keep yields high.
For the tobacco companies above that may be due to ethics.
Some investors may shy away from what they see as “sin shares” like brewers.” For example, I personally have no interest in investing in companies that produce weapons that are sold around the world.
But sectors may be avoided for non-ethical reasons. Sometimes, they just go out of style.
Most of the FTSE 250 stocks are currently high-yielding – ie Bluefield Solar Income Fund with its 11.1% yield – they are in the renewable energy business.
Investors have cooled across the sector, share prices have fallen (Bluefield Solar Income Fund is 36% lower than five years ago) and dividend yields have risen.
Bicycle businesses
That can happen in cyclical sectors as well.
It is still too early to say whether the decline in renewable energy performance is permanent, or part of the business cycle.
But we know that many fields have cycles. Oil and mining may be doing well right now, but not all cyclical sectors are doing well.
Take home builders as an example. FTSE 100 member Barratt Redrow yields 6.0%. It has already cut its interim dividends this year.
In good times, cyclical industries can see stocks rise. On the downside – as we are currently seeing with UK housebuilders – weak performance could lead to lower prices.
That would increase the yield, but that’s usually because the City expects a dividend cut sooner or later.
Corporate messaging
Another situation even in a non-cyclical industry would be when a successful company runs into trouble and changes.
Case in point: Pets at Home (LSE: PETS).
The FTSE 250 share has more than halved in five years, pushing its dividend yield down to 7.2%, although changes in payout policy mean lower dividends are likely in the future.
Could this be a reflection of reduced income prospects, as I mentioned above?
Its industry may be strong, but the company’s stores have struggled to maintain sales levels.
The second half of last year saw sales numbers increase year on year. But it is not clear that incomes are also increasing.
I see a risk that the company may increase the discount, helping sales prices but hurting profit margins.
However, I see a strong brand, a large customer base, and a plan to change stores as reasons for optimism.
The company’s animal operations division continues to grow well. I think this is a share for investors to consider.
