To help me cope with the cost-of-living crisis, a second income is appealing to me. My portfolio already contains a number of good dividend stocks, but there’s always room for more. Due to their high yields, two shares have caught my eye. Should I buy them?
Read all about it
Reach (LSE:RCH) owns 130 newspapers and magazines, including the Daily Mirror, Daily Express and Manchester Evening News. It says 20% of UK adults will have read at least one of its titles during the past month.
But it has struggled recently due to the economic slowdown. Advertising revenues have fallen and Reach has suffered a £40m increase in newsprint costs. Despite this, it made an operating profit of £70m on sales of £601m in 2022.
However, disappointing trading updates and a gloomy outlook have caused the share price to fall by 60%+ during the past year.
But Reach continues to pay a healthy dividend. In 2022, it paid 7.34p a share — 19.5% more than in 2018.
The combination of a good dividend and falling share price means it now yields over 10%.
On point
Paypoint (LSE:PAY) is another company affected by the squeeze on incomes. It provides payment services to individuals and businesses. It also helps collect the TV licence fee. The company operates from 63k sites across the UK.
Its share price has fallen by over 55% since its peak in January 2020 and turnover last year was nearly a third lower than in 2018.
| Measure / Financial Year (31 March) | 2018 | 2019 | 2020 | 2021 | 2022 |
| Revenue (£m) | 213.5 | 211.6 | 144.3 | 127.5 | 145.1 |
| Operating profit (£m) | 53.4 | 54.0 | 50.5 | 22.3 | 50.6 |
| Profit after tax (£m) | 43.0 | 44.4 | 40.0 | 15.9 | 39.5 |
However, it’s forecast to pay a dividend of 37.9p per share this year — it was 35p in 2022 and 32.2p in 2021. If this prediction is correct, the shares would yield over 8%.
Another income
Like everyone else, I can invest £20,000 in a Stocks and Shares ISA in this tax year. Any capital gains and dividend income won’t be taxed.
If I were to split this allowance equally between the two stocks, I could generate an additional income of £157 per month. But should I?
| Stock | Investment (£) | Dividend yield (%) | Possible annual dividend (£) | Possible monthly dividend (£) |
| Reach | 10,000 | 10.5 | 1,050 | 88 |
| Paypoint | 10,000 | 8.3 | 830 | 69 |
| Combined | 20,000 | 9.4 | 1,880 | 157 |
Decision time
Historically, journalists have been well rewarded, including generous guaranteed pensions. Although most of these schemes have now been closed to new members, existing obligations must be met.
In the past two years, Reach has paid nearly £120m into its legacy schemes. During this period, the cash generated from operating activities was only £104m. Last year’s dividend will cost £23m — more than its operating cash flow for 2022.
Because of this pressure on its cash, I can’t see Reach’s dividend being sustained at current levels.
As for Paypoint, the company isn’t growing. It recently bought Appreciate Group — a Christmas savings club and gift card business — for £83m. Last year, Appreciate made an operating profit of £6m on sales of £386m. I don’t think this acquisition is going to radically transform the fortunes of the enlarged group.
Therefore, as attractive as the yields might be for these two stocks, I won’t invest in either. The returns on offer are generous, partly because of the decline in their share prices. But I see little in the short term that’s going to reverse the downward trend.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
This post was originally published on Motley Fool
