One 5% yielder I'd buy and one I'd sell

Telecoms colossus TalkTalk Telecom Group(LSE: TALK) has disappointed dividend chasers in recent times as its deteriorating balance sheet and declining revenues have weighed.

In the year to March, the London company slashed the annual payout to 10.29p per share from 15.87p in the prior 12 months, TalkTalk electing to rebase the dividend as part of new executive chairman Charles Dunstone's drive to prioritise "growth, cash generation and profit."

And City analysts do not believe the bad news is over just yet -- an extra reduction, to 9.8p, is forecast for the current fiscal period.

On fragile ground

Many stock pickers will still be drawn in by a big dividend yield (this stands at 5.3% for fiscal 2018), not to mention predictions that rewards will begin rising again from next year. A 10p payout is forecast for 2019, pushing the yield to 5.4%.

However, I believe TalkTalk remains an unappealing share despite these projections. Firstly, current projections are at odds with the firm's decision to reset the dividend to 7.5p per share for the present period. And I am far from confident that payouts should improve looking down the line.

The telecoms titan advised in May that dividend growth should resume "once business returns to earnings growth and leverage has reduced towards 2.0 times." But the company still has a long way to go to get to its leverage target, its net debt-to-EBITDA ratio clocking in at 2.57 times as of March.

And TalkTalk faces a number of obstacles to earnings growth, even if the Square Mile has predicted expansion of 1% and 23% in the years to March 2018 and 2019 respectively.

While customers may be returning to the company after 2015's disastrous data hack (the company added 22,000 new customers during January-March), TalkTalk may struggle to keep this pace going as rivals such as BT and Sky cut prices to lessen their rival's position in the value segment.

I reckon the company's uncertain sales outlook and mountainous debt pile should encourage income seekers to invest elsewhere.

A pretty picture

I am far more optimistic about the investment outlook of Photo-Me International (LSE: PHTM), meanwhile.

The Leatherhead company has a long record of meting out large dividend increases, assisted by its knack of cranking out solid earnings growth year after year. And City analysts expect further bottom-line progress to keep driving dividends higher.

An anticipated 7p per share dividend for the year to April 2017 is predicted to rise to 8.4p in the current period, supported by an estimated 5% bottom-line lift. Moreover, payments are expected to advance again to 9p in the following year, underpinned by a predicted 6% earnings improvement.

As a result, Photo-Me sports market-stomping yields of 5.2% and 5.6% for fiscal 2018 and 2019 respectively.

In June's pre-close update the business announced last month that it had made "excellent progress" during the last fiscal year, reflecting "the success of its strategy of investing in new products, growing its laundry business and favourable currency movements."Consequently Photo-Me expects pre-tax profit to have grown at a record pace of around 20% year-on-year.

And I am confident profits should keep on marching northwards as the firm bolsters investment in its photo booths of which Photo-Me currently has 46,000+ machines spanning 17 countries, and continues the expansion of its laundry division across Europe.

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Royston Wild 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.

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