Dividend stocks proved to be a very popular area for investors in 2022. I think this will continue in 2023. This is because inflation is still above 10% and will take some time to get back to the 2% target level.
I can use dividends to help to offset the impact of high inflation that’s eroding the value of my money. Yet I’m not buying every income share I can get my hands on. In fact, here are a couple I think could spell trouble that I’m staying away from.
Failing to deliver
First up is International Distribution Services (LSE:IDS). The company is the renamed Royal Mail, and still houses the division, along with GLS. At the moment, the dividend yield is 6.32%, with the share price down 58.8% over the past year.
Even though the dividend yield calculation is my preferred way of spotting high potential income stocks, I need to use it carefully. This is a clear example of why. The dividend per share payment is taken from the past 12 months. Over this period, the business has paid out 13.3p per share. Hence, the yield comes out at the attractive 6.32%. However, the dividend has recently been cut to zero in a November trading update. So no interim dividend will be paid.
The dividend has been put to zero for the time being due to financial problems. It reported an operating loss of £163m in H1, compared to the operating profit of £311m from H1 last year.
It spoke of “weak parcel volumes, inability to deliver productivity improvements and impacts from industrial action”.
If I buy the stock now, chances are I’m not going to get any income payment until around September. So my real dividend yield for the coming months will be 0%.
I could be pleasantly surprised on future dividends, especially if strike action is resolved and worker motivation (and efficiency) really picks up.
A falling price
The other stock I’m not buying is Pets At Home Group (LSE:PETS). The pet product retailer has a dividend yield of 4.26%, but the share price is down 39% over the last year.
Even though the yield is above average, I have some concerns about the outlook for the business going forward. In half-year results through to the middle of October, pre-tax profit fell 9.3% on the same period last year. It flagged higher energy and freight costs.
I feel these issues will have only increased since October, especially with energy prices for corporates not having the same cap as residential buyers.
I also think that during the next year, the cost-of-living crisis will make UK consumers cut back on discretionary spending. Unfortunately, pet toys and new accessories are definitely discretionary. I’ve been surprised at how well revenue has held up in 2022 for the company, but think it’s only a matter of time until it starts to fall in 2023.
The business is in a strong financial position, with full-year guidance to generate a profit of £131m. So it could weather the looming storm and keep dividend payments up. Yet I feel there are much better dividend options out there.
Jon Smith 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.
Motley Fool UK 2023