As a veteran value/income/dividend investor, I favour shares that offer high dividend yields. Currently, there’s no shortage of such candidates in the FTSE 100 and FTSE 250.
FTSE falling
However, the UK stock market hasn’t had a great start to 2023. Since 29 December, the Footsie is down 3.5%, while the FTSE 250 has lost 4.2%.
Then again, when share prices fall, this can boost dividend yields, making cash returns from shares more attractive. But all this hinges on whether companies continue to make these cash payouts in future.
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For example, take the stock of FTSE 250 firm Close Brothers Group (LSE: CBG), whose share price has taken a beating this month. Close is a mid-sized player in UK merchant banking, business and consumer lending, wealth management and securities trading.
At their 2023 high, Close shares hit 1,139p on 6 January 2023. On Friday (19 January) they closed at 597.5p, valuing the group at £899.2m. They also hit a 52-week low of 593p on Friday.
The stock has crashed hard, plunging 24.9% so far this year, while also losing 36.4% of its value over one year. Even worse, the share price has collapsed by 60.6% over five years.
Delicious dividends
It’s important to note that the above losses exclude dividends, which are hefty from Close. The full-year payout for 2022-23 was 67.5p a share, plus it was 66p for 2021-22 and 60p for 2020-21.
In other words, if Close were to make the same cash payout in this financial year, then its shares would yield a whopping 11.3% a year. To me, that sounds mouth-watering. But there may be a catch.
Decades of investing have taught me that double-digit dividends rarely last. Either share prices rise or dividends are cut, both of which drive down cash yields. And a cut might be on the cards at Close.
What’s wrong?
The shares trade on a multiple of 11 times earnings, delivering an earnings yield of 9.1%. But this is only enough to cover four-fifths of the dividend yield of 11.3% a year. Eventually, something will have to give.
However, an even bigger concern is that Close is a big player in motor finance — an area that has recently come under scrutiny from regulator the Financial Conduct Authority (FCA).
The FCA is concerned that car dealers have been widely mis-selling finance to borrowers. I absolutely know this went on, as I worked in this sector for 15 years, plus I was the lead whistle-blower on the payment protection insurance (PPI) scandal.
Given my inside knowledge of this industry, I suspect that millions of car buyers could be in line for billions of pounds in mis-selling compensation. This would be a body blow for major British banks and lenders, including Close.
For the record, my wife and I bought Close shares in August 2023 at 833.4p a share and are nursing a paper loss of 28.3% to date. Despite these setbacks, I intend to hold on to our stake until the situation becomes clear. But if the next news is bad, then I may have to sell!
