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