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As a veteran worth/revenue/dividend investor, I favour shares that provide excessive dividend yields. At present, there’s no scarcity of such candidates within the FTSE 100 and FTSE 250.
FTSE falling
Nonetheless, the UK inventory market hasn’t had a fantastic begin to 2023. Since 29 December, the Footsie is down 3.5%, whereas the FTSE 250 has misplaced 4.2%.
Then once more, when share costs fall, this may increase dividend yields, making money returns from shares extra engaging. However all this hinges on whether or not corporations proceed to make these money payouts in future.
For instance, take the inventory of FTSE 250 agency Shut Brothers Group (LSE: CBG), whose share value has taken a beating this month. Shut is a mid-sized participant in UK service provider banking, enterprise and client lending, wealth administration and securities buying and selling.
At their 2023 excessive, Shut shares hit 1,139p on 6 January 2023. On Friday (19 January) they closed at 597.5p, valuing the group at £899.2m. Additionally they hit a 52-week low of 593p on Friday.
The inventory has crashed exhausting, plunging 24.9% thus far this yr, whereas additionally dropping 36.4% of its worth over one yr. Even worse, the share value has collapsed by 60.6% over 5 years.
Scrumptious dividends
It’s essential to notice that the above losses exclude dividends, that are hefty from Shut. The total-year payout for 2022-23 was 67.5p a share, plus it was 66p for 2021-22 and 60p for 2020-21.
In different phrases, if Shut have been to make the identical money payout on this monetary yr, then its shares would yield a whopping 11.3% a yr. To me, that sounds mouth-watering. However there could also be a catch.
A long time of investing have taught me that double-digit dividends not often final. Both share costs rise or dividends are reduce, each of which drive down money yields. And a reduce may be on the playing cards at Shut.
What’s flawed?
The shares commerce on a a number of of 11 instances earnings, delivering an earnings yield of 9.1%. However that is solely sufficient to cowl four-fifths of the dividend yield of 11.3% a yr. Ultimately, one thing should give.
Nonetheless, an excellent larger concern is that Shut is an enormous participant in motor finance — an space that has just lately come beneath scrutiny from regulator the Monetary Conduct Authority (FCA).
The FCA is anxious that automobile sellers have been extensively mis-selling finance to debtors. I completely know this went on, as I labored on this sector for 15 years, plus I used to be the lead whistle-blower on the fee safety insurance coverage (PPI) scandal.
Given my inside information of this trade, I think that hundreds of thousands of automobile patrons may very well be in line for billions of kilos in mis-selling compensation. This could be a physique blow for main British banks and lenders, together with Shut.
Lastly, one thing odd occurred final week, as Shut didn’t launch its second-quarter buying and selling replace scheduled for Friday.
For the document, my spouse and I purchased Shut shares in August 2023 at 833.4p a share and are nursing a paper lack of 28.3% up to now. Regardless of these setbacks, I intend to carry on to our stake till the state of affairs turns into clear. But when the subsequent information is unhealthy, then I could should promote!
