Super-high dividend yields of more than 10% are always tempting. But all too often they turn out to be a sign that trouble lies ahead. Such high yields often lead to dividend cuts and share price falls.
The two stocks I’m looking at today boast forecast dividend yields of 18% and 12%. Based on the latest available information, I reckon they’re probably affordable this year. But significant risks remain for shareholders of both firms. Should we be buying these stocks or steering clear?
Volatile market boosts revenue
Shares in online financial trading firm Plus500 (LSE: PLUS) edged higher this morning, after the company reported half-year revenues of $148m and improved trading during the second quarter.
The firm says that market volatility increased during Q2, resulting in higher levels of trading. This lifted Plus500’s revenue to $94m, up from $53.9m in Q1.
Management said that lower levels of competition have resulted in reduced marketing costs. This has enabled the company to “increase the rate of new customer recruitment” at a lower average cost per customer.
One reason for this may be that the company is focusing more heavily on overseas clients. Management said 48% of revenue was generated outside the EEA. Within the EEA, 23% of revenue came from clients classified as professional, who are exempt from last year’s rules.
Is this performance sustainable?
Looking at Plus500’s historical performance, my sums suggest that if the firm’s performance remains stable during the second half of the year, broker forecasts for earnings of $1.22 per share look reasonable. Given the group’s sizeable net cash balance, I share analysts’ views that all of this profit is likely to be returned to shareholders through dividends.
On that basis, Plus500’s 2019 forecast yield of 18% looks realistic to me. What is less clear is the outlook for this firm, which I feel operates very opportunistically, rather than with a clear long-term strategy.
Personally, PLUS stock is too speculative for me. But it could still have money-making potential.
An unloved 12% bargain?
My next stock is one of troubled fund manager Neil Woodford’s bigger holdings. Mr Woodford’s funds own 11.8% of NewRiver REIT (LSE: NRR) stock, even after recent sales.
This UK property firm specialises in ‘convenience-led’ and ‘community-focused’ assets. What this seems to mean is a mix of retail parks, shopping centres and pubs. Typical tenants include discount supermarkets, convenience stores and other value retailers.
Reassuringly, NewRiver’s exposure to department stores and casual dining chains — two of the biggest problem areas on the high street — is very limited.
So far, so good?
NRR’s performance last year was not bad. Although its loan-to-value ratio rose from 28% to 37%, the company says this was mainly due to new investments, not to falling property values.
I wouldn’t want to see gearing rise much further. But although the stock’s net asset value fell by 10.6% to 261p per share last year, underlying cash generation remained broadly unchanged. NewRiver’s net income from property rose to £90.5m, up from £87.1m in 2017/18.
I’m not completely comfortable with this situation — occupancy fell slightly last year and we may yet see this trend continue. But there are no obvious signs of distress at the moment. If the economy remains stable, NRR’s 12% dividend yield could prove to be a bargain.