One 5% dividend yield I’d buy today and one I’d sell

A fresh quarterly trading update was released by Topps Tiles (LSE: TPT) on Wednesday morning. And guess what? The wall-and-floor-coverings play was sinking again after announcing news of further sales slippage in the most recent trading period.

Topps saw like-for-like revenues backtrack 2.3% during the 13 weeks to July 1, continuing the steady top-line deterioration seen since the start of the fiscal year. Sales on a comparable basis rose 3.4% during quarter one and fell 2.2% in the second quarter.

The building materials business advised that “trading over the third quarter has been reflective of a weaker consumer environment,” though it added that “we continue to outperform the overall tile market.” This last point should come as little comfort to owners of Topps Tiles’ shares however, given the vast sums it is investing in improving its product ranges and store refurbishments and openings.

On the slide

Last time I covered Topps Tiles in March, I warned of the intense pressure on shoppers’ spending power that has damaged sales at the business. Today’s release again vindicates my concern and has reinforced my bearish take on the retailer’s fortunes.

City analysts have been scaling back their earnings forecasts in the weeks since my latest article and they are now predicting a 15% slump for the year to September 2019. With trading conditions still worsening I reckon further downgrades are just around the corner, making Topps Tiles’ low forward P/E ratio of 9.6 times something of an irrelevance.

I am also not tempted by it as a dividend stock. A 3.3p per share reward is currently anticipated by the number crunchers, and this figure — which yields an impressive 5.3% — is also covered 2 times by anticipated profits, bang on the company’s stated target.

But given the prospect of earnings also disappointing, as well as the predicted 3% profits bounceback forecast for fiscal 2019, I reckon the business, which of course already cut the dividend last year, could reduce shareholder rewards more than anticipated. Its hefty £25.1m debt pile (as of March) should give additional cause for concern. I would sell the stock without delay.

Join the club

There’s another 5% yielder I’d much rather plough my investment cash into today, namely Morses Club (LSE: MCL).

Assisted by predictions of further healthy earnings growth — rises of 14% and 16% are predicted for the periods ending February 2019 and 2020 respectively — the doorstep lender is anticipated to lift fiscal 2018’s 7p per share dividend to 7.8p in the current year and to 9p in the next.

Morses Club carries monster yields of 5.1% and 5.8% for these respective years as a consequence. And the company’s last market update last week, in which it advised that “trading in the first four months of our current financial year has been strong,” convinces me that it can meet such impressive profits and dividend estimates.

A forward P/E ratio of 11.5 times is much too cheap given the rate at which its loan book is swelling and its customer base improving. I reckon Morses Club is a great income share to buy today.