Trying to find dividend shares with a sustainably high yield is a tricky endeavour. Sometimes, the allure of a really high dividend yield can blind me to the red flags associated with a particular company. Taking a step back before I commit to anything has helped me in the past. Therefore, here are two ideas that look juicy but aren’t worth the risk, in my view.
A big fat zero
At first inspection, Close Brothers (LSE:CBG) might look appealing. The dividend per share over the past year has been 45p, so when I combine this with the current share price I get a yield of 9.43%.
However, this only tells half the story. Back in February, the company released a statement in which it announced that it wouldn’t be paying any dividends for the current financial year. This was due to the ongoing review from the Financial Conduct Authority (FCA) regarding historical motor finance commission arrangements.
Depending on the outcome of the review, Close Brothers could be fined and penalised in other ways. Therefore, it makes sense to try and preserve cash flow for any potential need here.
Yet for a dividend investor like me, I see little point in buying now. The dividend yield is misleading, as I wouldn’t be getting any dividends in the near future.
That said, the 43% drop in the share price over the past year might lead some value investors to buy for the long term. It’s true that the bank has a strong track record, having been founded over a century ago.
Struggling at the moment
A second firm I’m cautious about is Crest Nicholson (LSE:CRST). The share price for the UK home builder is up 8% over the past year. However, I don’t feel this tells the full story.
The business has issued several profit warnings over the past year. The last one came just a couple of months ago with the half-year results. It was blamed on various things, ranging from a low level of reservations, a tough macro backdrop, along with one-off exceptional items. The disappointing finances meant that the dividend paid was just 1p per share, in contrast to the 5.5p from the same time last year.
This has reduced the dividend yield to 5.86%. However, some might think that this is still attractive, as it’s above the FTSE 250 average yield. This is true, but something else concerns me.
Bellway has just pulled out of making a firm offer for Crest Nicholson. The larger rival believes it has a strong enough balance sheet to grow organically. Without this deal, it’ll likely make it harder for Crest Nicholson to get back to financial health quickly. The stock fell 15% last week when the news was announced.
Therefore, I see future dividends under pressure of being cut again. Until the firm starts to perform better, it doesn’t look attractive to me. Of course, I could be wrong. Homebuilders should benefit from lower interest rates here in the UK. This should make mortgages more affordable and provide higher demand for property sales.
This post was originally published on Motley Fool
