I’d happily sell this 6%-yielding FTSE 100 dividend stock for this Footsie 3% yielder

A person holding onto a fan of twenty pound notes

The release of latest UK retail sales data from the Office for National Statistics may not have been spectacular, but the numbers were absorbed with great fanfare by the market. A 0.3% rise in August bucked predictions of a drop by City analysts, and gave hope for a perkier-than-expected performance from the whole UK economy for the third quarter.

But for Marks and Spencer Group(LSE: MKS) the numbers weren’t particularly encouraging. Sales at Britain’s food stores dropped 0.6% last month, a worrying omen for the FTSE 100 company’s increasingly-troubled Simply Food outlets. But more chilling for M&S was news that clothing sales fell 1.9% in August.

Still sinking

Marks & Spencer’s share price has shrunk by close to a fifth during the past 12 months amid growing investor impatience over its transformation strategy still failing to boost its performance.

And as conditions become tougher on the high street, increasingly constrained consumer spending power adding to the intensifying competitive pressures for the country’s mid-tier clothiers, it’s more than likely that the company’s plans will keep on floundering.

Marks & Spencer has noted in recent months that demand for its fashion offer has worsened over the past couple of quarters, leading to City analysts marking down their earnings forecasts. And in the current climate it’s not difficult to see the number crunchers cutting down their current estimate of a 6% profits decline in the year to March 2019.

Dividend projections have also been fractionally downscaled in recent weeks, and an 18.7p per share payout is now being touted by the calculator bashers. However, I reckon M&S may struggle to keep the annual dividend frozen at fiscal 2018 levels — or raise it to 18.9p next year, as the City suggests — given the double whammy of falling revenues and increasing costs on its profits outlook, not to mention its debt-laden balance sheet.

Right now I’d ignore the bulky 6.5% and 6.7% yields for this year and next respectively, as well as its low forward P/E ratio of 11 times. It simply carries far too much risk.

Boxing champ

DS Smith (LSE: SMDS) does not pack the same sort of monster dividend yields as Marks and Sparks. For the 12 months to April 2019 a predicted 16.5p per share payout yields 3.4%, while for fiscal 2020 the yield sits at a decent-if-unspectacular 3.6% thanks to the anticipated 17.4p dividend.

However, I still believe the box-maker is in much better shape to keep growing annual dividends as well as paying out above-inflation rewards than M&S, both in the medium term and beyond. And this is why I’d happily sell out of M&S to buy shares in this business.

DS Smith has seen its earnings stomp reliably higher over many years now and City analysts don’t expect this story to end (they are predicting a 13% rise in the current period). And why would they? The Footsie firm’s commitment to expanding its footprint across the emerging markets of Central and Eastern Europe, and now the US too, gives it exceptional revenues opportunities to shoot for.

And for all of this DS Smith boasts a forward P/E multiple of 12.9 times. It’s a bargain right now and I think all savvy investors need to consider piling in today.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended DS Smith. 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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