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5.5% yield! Should I buy this FTSE 250 dividend growth stock for 2023?

Bearded man writing on notepad in front of computer
Image source: Getty Images

I think buying dividend shares could again be the best way to make solid returns in the new year. So I’m searching the FTSE 100 and FTSE 250 for the best income stocks to buy.

Office space and retail property owner Hammerson (LSE:HMSO) is one high-yield dividend stock on my radar today. Should I buy it for its huge forward dividend yield? Or do the risks facing the business in 2023 make it too risky for investors?

Physical retail slumps

Physical retail endured another bruising year in 2022. In fact, there were a whopping 50 store closures every day last year, according to the Centre for Retail Research.

This was up almost 50% on 2021 levels and the highest level for five years. The body said that rationalisation rather than company failure was the main driver for closures “as retailers continue to reduce their cost base at pace”.

It warned that this trend was likely to continue in 2023 too, though it added that “a few big hitters” might also go to the wall.

Dividend growth

This is a big problem for retail property owners like Hammerson. Indeed, City analysts think earnings here will fall 10% next year.

Yet at the same time, those same brokers expect the shopping centre owner to supercharge dividends over the short term. The 0.4p per share payment of 2021 is tipped to rise to 0.7p for last year before rising to 1.3p this year.

Consequently, Hammerson carries an enormous 5.5% dividend yield for 2023. This is comfortably above the forward average of 3.3% for FTSE 250 shares.

Debt concerns

But how realistic is the current dividend forecast? Well, poor dividend coverage casts doubt over the robustness of 2023’s projection. This sits at just 1.4 times for 2023, well below the safety minimum of 2 times.

On the plus side, Hammerson plans another £300m worth of asset disposals by the end of next year. That’s could give it the financial muscle to pay that big dividend City analysts are forecasting.

However, there is, of course, no guarantee that it will get those balance-sheet-boosting sales over the line. The tough economic climate could make it even more difficult for Hammerson to hive off assets, too.

This is particularly concerning given the huge debts the business still has to pay back. Net debt stood at a colossal £1.7bn as of June.

The verdict

The good news is that footfall at Hammerson’s retail properties “consistently exceeds national indices”, it said in November. In fact, third-quarter visitor numbers in the UK and Ireland stood at around 90% of 2019 levels. If this continues then earnings might well surprise to the upside.

But this isn’t a risk I’m willing to take. I’m also worried about Hammerson’s long-term outlook as the growth of e-commerce erodes footfall at physical retail destinations.

On balance, I think there are better FTSE 250 dividend stocks to buy for 2023 and beyond.

The post 5.5% yield! Should I buy this FTSE 250 dividend growth stock for 2023? appeared first on The Motley Fool UK.

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Royston Wild 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