One bargain-basement dividend stock I’d buy and one I’d sell

These two dividend stocks could have different futures.

| 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.

With inflation moving higher in recent months, dividend shares are understandably becoming more popular among investors. This is to be expected, since inflation is eating away at the value of a range of assets and causing negative real returns in some cases.

However, not all dividend stocks may be worth buying at the present time. Some stocks may offer high yields, but have relatively uncertain growth outlooks. With that in mind, here is one dividend stock which appears to be worth selling, followed by another that could be a sound buy.

Falling profitability

UK consumer marketing business NAHL (LSE: NAH) released an update on Friday. The legal services-focused business announced that it has established its second Alternative Business Structure (ABS) in partnership with Lyons Davidson. The ABS will trade under the name National Law Partners and is expected to commence in November.

This forms part of the company’s strategy to advance its business model following the Personal Injury reforms announced by the government. In the long run, the ABS could help the company to grow its share of the Personal Injury market.

However, in the next couple of years the company is forecast to post a significant fall in its bottom line. For example, in the current year its earnings are due to fall by 11%, with a further decline of 20% expected next year. This means that dividends are expected to be cut from 19p per share last year to 13p per share in 2018.

While this still means that NAHL has a forward dividend yield of 8.9% and shareholder payouts should be covered 1.5 times by profit, the stock may struggle to make gains. Investor sentiment could decline in response to falling profitability, which means that its high income return may be more impressive than its total return.

Growth potential

In contrast, FTSE 100-listed Smurfit Kappa (LSE: SKG) is expected to post impressive earnings growth next year. The paper-based packaging specialist is forecast to grow its bottom line by 15% in the next financial year. When combined with a modest price-to-earnings (P/E) ratio of 12.5, this gives the stock a price-to-earnings growth (PEG) ratio of just 0.8. This suggests that its share price could move higher.

As well as growth potential, Smurfit Kappa also appears to have dividend appeal. The company has a dividend yield of 3.4% from a shareholder payout that is covered 2.4 times by profit. This suggests that dividends could grow at a much faster pace than profit without reducing the reinvestment potential available to the business.

With relatively solid profit growth over the last five years, Smurfit Kappa could prove to be a sound buy for the long term. Since the outlook for the UK economy is uncertain, it could provide a mix of defensive attributes, dividend growth potential and capital gains over the long run. As such, now could be the perfect time to buy it.

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.

Peter Stephens 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

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

3 value shares for investors to consider buying in 2025

Some value shares blew the roof off during 2024, so here are three promising candidates for investors to consider next…

Read more »

Investing Articles

Can this takeover news give Aviva shares the boost we’ve been waiting for?

Aviva shares barely move as news of the agreed takeover of Direct Line emerges. Shareholders might not see it as…

Read more »

Investing Articles

2 cheap FTSE 250 growth shares to consider in 2025!

These FTSE 250 shares have excellent long-term investment potential, says Royston Wild. Here's why he thinks they might also be…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

Has the 2024 Scottish Mortgage share price rise gone under the radar?

The Scottish Mortgage share price rise has meant a good year for the trust so far, but not as good…

Read more »

Investing Articles

Will the easyJet share price hit £10 in 2025?

easyJet has been trading well with rising earnings, which reflects in the elevated share price, but there may be more…

Read more »

Investing Articles

2 FTSE shares I won’t touch with a bargepole in 2025

The FTSE 100 and the FTSE 250 have some quality stocks. But there are others that Stephen Wright thinks he…

Read more »

Dividend Shares

How investing £15 a day could yield £3.4k in annual passive income

Jon Smith flags up how by accumulating regular modest amounts and investing in dividend shares, an investor can build passive…

Read more »

Investing Articles

Could this be the FTSE 100’s best bargain for 2025?

The FTSE 100 is full of cheap stocks but there’s one in particular that our writer believes has the potential…

Read more »