One dividend stock I’d buy for my ISA before February, and one stock I’d avoid

Royston Wild looks at a couple of stocks before the release of upcoming financials. Should you buy them for your Stocks and Shares ISA?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Those looking to buy some top dividend shares on a shoestring should look at Reach (LSE: RCH). The media giant’s share price has leapt 136% in 12 months yet on paper it remains spectacularly cheap. The small-cap stock trades on a forward price-to-earnings ratio of 3.5 times and boasts a giant 5.2% dividend yield, too.

City analysts expect earnings to fall 5% at Reach, the owner of the Mirror line of titles as well as more recently the Express and Star mastheads, in 2020. The publishing market is tough, sure, as advertising budgets remain under no little pressure. But I reckon the company’s low rating fails to reflect the pace at which revenues at its digital operations are taking off.

Online sales rose 14% between 1 July and 29 November, Reach reported last time it updated the market. This was up from 9% in the same 2018 period. And I expect the top line to keep soaring over the long term as Reach expands to grow its readership.

I’m expecting another sunny set of numbers when full-year results come out on Monday, 24 February. I therefore reckon the publisher is a top income buy right now.

Too expensive?

I certainly won’t be buying Dunelm Group (LSE: DNLM) today, though. It’s loaded with risk as retail sales in the UK continue their steady decline. And yet this FTSE 250 stock commands a premium rating, a forward P/E rating of 21.6 times.

That said, there’s sure to be an army of happy buyers in the lead up to half-year trading numbers scheduled for Wednesday, 12 February. Dunelm’s ability to defy gravity has been quite impressive, all told. The furniture specialist released another strong update last month. A 5% rise in like-for-like growth between June and August was also particularly decent in the context of the strong comparatives of a year earlier. Underlying sales rocketed almost 11% then.

Dunelm’s refusal to engage in Black Friday promotions or pre-Xmas sales made that latest number even more impressive. This decision also boosted gross margins by 1.1% in the quarter. So what’s my beef, you may ask? Well that monster earnings multiple and smallish forward dividend yield (of 2.6%) means that Dunelm comes packed with plenty of risk but with potentially very little reward.

Look elsewhere

The launch of its new digital platform may give the business more reason to expect sales to keep tearing higher (revenues generated via Dunelm.com jumped more than a third in the last quarter). City analysts expect earnings to rise 8% in the fiscal year to June 2020 and by 6% the following year.

But with geopolitical and economic uncertainty threatening to linger through the rest of this calendar year and possibly beyond, too, I can’t help but fear that Dunelm might struggle to keep up the pace, and that its huge premium leaves it in danger of a share price correction. I’d rather park my hard-earned investment cash elsewhere.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Royston Wild 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.

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »