Watch out! 2 dividend stocks I think could cost you a fortune in 2020

Fancy grabbing a slice of these cut-price dividend shares? You’d be much better giving them a miss, says Royston Wild.

| 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.

The demise of a company is usually greeted with glee by shareholders in rival firms. It often leads to a spate of buying activity as new investors, excited by an oft-improved revenues outlook try to grab a slice of the action. The bounce that holiday companies easyJet, TUI Travel and On The Beach following the failure of Thomas Cook in the autumn is perfect evidence of this.

But sometimes the rate of failure is so bad that everyone starts to feel the tension. This is illustrated by the share price decline of The Restaurant Group (LSE: RTN) in the past five years. The mid-level eateries operator has seen its share price plummet more than 80% in that time, a decline that comes despite a high number of competitor failures and a larger number of rival chains cutting their estates left, right and centre.

Too much risk!

A combination of rising business rates, increasing labour costs, and a hugely-competitive marketplace is smashing margins. And there’s evidence of this everywhere, the latest chain to go to the wall this week being Handmade Burger Company with the closure of 19 restaurants.

The Restaurant Group certainly hasn’t been able to reap the rewards of this thinner market. Annual earnings have dropped for the past three years on the spin for which it has already reported. And City analysts expect another bottom-line drop to be disclosed for 2019.

The FTSE 250 firm is cheap as chips. It can be bought on a low forward P/E ratio of 10 times, though I’m not impressed. I’m also unmoved by a robust corresponding dividend yield of 5%. With sales beginning to worsen markedly again — growth slumped to just 0.2% on a like-for-like basis in the six weeks to June 30, most recent financials showed — I think The Restaurant Group’s in danger of extending its share price downtrend. And this could be set off by the release of fresh trading numbers in the coming days.

Drive on by

Inchcape (LSE: INCH) is another company from Britain’s second-tier share index that appears attractively valued. It currently rocks a P/E ratio of just 12.8 times for 2020 and a chunky 3.9% dividend yield.

However, I also believe that this FTSE 250 share also carries too much risk. Financials for 2019 are scheduled for February 27 and I fear that a shocking set of trading numbers could be around the corner here too.

It’s not just that sinking auto demand in the UK is hammering the car retailer right now. Inchcape’s web is spun far and wide. It operates across Europe, Asia, Africa and even Australasia, but this is providing little comfort as car sales fall across all major regions.

LMC Automotive data shows that car sales worldwide slumped to 90.3m units in 2019 from 94.4m units the previous year. And the auto analysts expect sales to drop again in 2020 to 90m units, according to CNN. No wonder City analysts are forecasting another profits drop for Inchcape in 2020. This is another stock I’d also avoid like the plague.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended On The Beach. 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 »