When cheap shares go badly wrong!

I bought these two cheap shares for their high dividend yields and recovery potential. Sadly, both share prices slumped, leaving me with egg on my face.

| 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.

Young Caucasian man making doubtful face at camera

Image source: Getty Images

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.

As I get older (I’m 55 next month), I find it increasingly easy to admit that I’m wrong. For me, it’s not making mistakes that’s the problem, it’s how I deal with them. Also, they say confession is good for the soul. So here are two cheap shares I bought last year that soon turned into complete howlers.

When cheap shares turn bad

1) Persimmon plunges

By far my biggest blunder in 2022 was buying the cheap shares of leading UK housebuilder Persimmon (LSE: PSN). In late July, my wife bought this FTSE 100 stock for our family portfolio for its huge dividend yield. Unfortunately, Persimmon’s double-digit cash yield soon turned into a double-digit price decline.

After Persimmon shares had already fallen steeply from their 2021 highs, we bought this stock at 1,856p. The share price now stands at 1,418p, down 438p from our buy price. That’s a loss of almost a quarter (-23.6%) in around six months. Ouch.

Should you invest £1,000 in Royal Mail Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Royal Mail Group made the list?

See the 6 stocks

In my post-mortem to establish what went wrong, I recalled that ultra-high dividend yields rarely last. All too often, share prices crash or dividends get slashed. For sure, Persimmon’s last full-year dividend of 235p a share won’t be paid in 2022/23. Instead, I expect to collect less than half of that. Oops.

Persimmon shares are down over two-fifths (-40.6%) over the last year and could be hit even harder by rising interest rates and falling disposable incomes. But we’ll hang onto our shares for their recovery potential. As one old stock-market saying goes, “Many a long-term investment started out as a losing short-term one”.

2) International Distributions Services slumps

The second of my cheap shares to slide is the stock of International Distributions Services (LSE: IDS). If that name doesn’t ring any bells, it’s the recently introduced handle for the former Royal Mail Group.

Of course, Royal Mail is a British institution, with a storied history dating back to 1516 and King Henry VIII. But its most recent history has been one of labour disputes, industrial action, and rounds of strike action.

In late June of 2022, my wife bought into this FTSE 250 firm at an all-in price of 273.2p. Alas, from August onwards, the shares plunged as union members went on strike for higher pay and better conditions. With neither side willing to compromise, the shares took a beating. At their 52-week low, they crashed to 173.65p on 14 October.

As I write, the IDS share price stands at 228.6p, having collapsed by almost half (-48.7%) in the past year. It also stands around a sixth (-16.3%) below our buying price. Again, having bought these cheap shares for their dividend-generating potential, we’re now sitting on a sizeable paper loss.

Meanwhile, the group’s market value has declined to under £2.2bn — a shadow of its former size. And the shares could suffer if the board decide to cut the 2022/23 dividend payout. But I see strong potential for a price recovery if and when the group settles with its striking workforce. For now, we will hang onto this shell-shocked stock in the hope of an earnings recovery and decent dividends once again!

Should you buy Royal Mail Group now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Cliff D’Arcy has an economic interest in International Distributions Services and Persimmon shares. 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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

£1,400 a year dividend income from a Stocks and Shares ISA? Here’s how

A new Stocks and Shares ISA year begins very soon and that certainly concentrates the mind on thinking about how…

Read more »

Investing Articles

Here’s the BP share price forecast for the next 12 months

The BP share price has been buffeted by negative events for years, and simply isn't the monster it used to…

Read more »

Calendar showing the date of 5th April on desk in a house
Investing Articles

Ahead of this week’s ISA deadline, here’s what a spare £10k could achieve!

Ahead of the annual ISA contribution deadline, our writer considers some of the potential gains and risks for an investor…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Could these super-high UK dividend yields be at risk?

These five FTSE 100 shares offer dividend yields of up to 9.4% a year. Alas, one of these payouts will…

Read more »

Investing Articles

Down 16% in a month, is this ultra-luxury stock now a no-brainer buy for my ISA and SIPP?

This investor is wondering if he should add to one of his favourite stocks inside his self-invested personal pension (SIPP)…

Read more »

Young woman holding up three fingers
Investing Articles

3 undervalued UK shares to consider for an ISA this April

Mark Hartley uncovers some of the most promising and undervalued UK shares on the market right now and considers their…

Read more »

Investing Articles

FTSE 100 stocks to consider buying in April

Reports from FTSE 100 companies are few and far between in April. But I see definite potential in a couple…

Read more »

British Pennies on a Pound Note
Investing Articles

3 penny share myths busted!

Are penny shares the best thing since sliced bread, or are they evil things to be shunned? The truth lies…

Read more »