One dividend stock I’d buy today, and one I’d sell

The best dividend shares to buy are ones with sustainable payouts.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Do you have trouble deciding whether to chase dividends or seek capital growth? Why choose when you can have both.

The recruitment business is cyclical, and that’s a good reason to look for sustainable dividends even through earnings downturns.

SThree (LSE: STHR) has kept its ordinary dividends at 14p per share right through the mini-downturn that hit in 2012 and 2013, even when it wasn’t covered by earnings in 2013 – and in better times it has paid a special dividend too. The ordinary dividend yield has been pretty good, running between 4.3% and 4.6% over the past five years. And though there’s no dividend uplift expected this year or next, on today’s share price of 309p we’d still be seeing respectable yields of 4.5%.

Growth too

What about growth? From 2014 onwards, EPS has been picking up again, rising from 16.8p per share in 2011 before the dip, to 23.2p in 2016, for overall growth of 38%.

The combination of reliable dividends and steady long-term earnings growth (despite short-term ups and downs) has helped the share price gain 43% over the past five years, and that’s added a bit over 30% to overall returns.

Forecasts for further EPS growth this year and next drop the forward P/E to less than 12.5 by 2018. And if it comes off then I reckon we’re looking at an attractive price right now – a below-average P/E for an above-average dividend yield.

And though UK gross profit for the first quarter this year was hit by the Brexit fallout, strong performances in the USA and continental Europe helped keep overall gross profit flat.

SThree looks like a solid long-term investment to me, at an attractive price.

Unsustainable

JZ Capital Partners (LSE: JZCP) saw its previous earnings growth come off the rails after 2014,  resulting in an EPS crash from 44.9 cents to just 6.7 cents for the year to February 2017. There are no consensus forecasts now, but at a share price of 558p, that represents a trailing P/E of 106!

JZ, which invests in US and European micro-cap companies and US real estate, cut its dividend by half this year – while switching its redistribution strategy to buying up its own shares when conditions are favourable. Though we still saw a yield of 2.3%, that’s not very impressive and to invest today I’d want to see clear evidence of some serious earnings growth in the medium term.

Latest update

The company’s first-quarter update on Thursday didn’t do a lot to change my mind. JZ reported a fall in net asset value (NAV) to $833.3m, from $848.8m at the end of the last full year, dropping NAV per share to $9.93. Admittedly, at the equivalent of around 766p, that exceeds the current share price of 558p and so the shares are trading at a discount.

But putting aside real estate, asset values of investments in companies, especially micro-cap ones, can be notoriously difficult to assess accurately.

Having said that, the company does appear to be in a net investing phase at the moment, having ploughed $43.9m into investments during the quarter, against only $16.3m realised from disposals. And earnings will surely be erratic over the long term, as it can take some time for an investment in the kinds of assets JZ goes for to come good.

But for me, there’s just too much uncertainty to consider buying at today’s price levels.

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.

Alan Oscroft has no position in any 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

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »