UK markets close in 2 hours 56 minutes

Buying this popular dividend share in 2022 was a mistake!

Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.
Portrait of elderly man wearing white denim shirt and glasses looking up with hand on chin. Thoughtful senior entrepreneur, studio shot against grey background.

For the first six months of 2022, my wife and I sat on the side-lines of global stock markets. As shares worldwide — and expensive US stocks in particular — crashed, we built up a war chest of cash to invest at lower prices. At the end of June, we began buying cheap stocks, mostly consisting of dividend shares to boost our passive income.

In one month, we bought nine dividend shares

From late June to late July, we bought nine new high-yielding shares for our family portfolio, consisting of six FTSE 100 shares and three FTSE 250 stocks. Overall, we’re pretty happy with our new mini-portfolio of would-be winners. Except, that is, for the lagging loser below.

To be honest, I messed up big-time by recommending this buy to my wife. In the interest of Foolish honesty and transparency, here’s what I (and not my good lady wife) did wrong.

Slumping share: International Distributions Services

International Distributions Services (LSE: IDS) has been Royal Mail group’s new name for just over a month. Of course, with a pedigree dating back to 1516, the universal postal service provider is a UK household name. But that doesn’t necessarily make it a good business to buy into.

That said, we bought IDS shares at the end of June at an all-in price (including dealing charges and stamp duty) of 273.2p a share. After rising initially, the shares then set off on a steep three-month slide. At their worst, they had collapsed to a 52-week low of 173.65p on 14 October. At this point, we’d suffered a paper loss of close to £1 a share — a collapse of more than a third (-36.4%). Whoops.

However, IDS shares have since rebounded over the last month, lifting their price to 235.1p. This still leaves them 46.8% lower over 12 months. This reduces our running loss to 13.9%, which comes as some relief just one month on.

We bought IDS too early

At the current share price, this FTSE 250 firm is valued at under £2.3bn — roughly two-thirds below its all-time peak capitalisation in May 2018. On two fundamental measures — its low price-to-earnings ratio and high earnings yield — this stock appears cheap, even today.

What’s more, this dividend share offers a cash yield of 7.1% a year, covered 3.7 times by earnings. This looks extraordinarily cheap, but the company faces an increasingly tough 2023. With group earnings facing strong headwinds, this cash return could be at risk. And no future dividend is guaranteed, of course.

In hindsight, it was clear that I was too optimistic in June about IDS’s prospects over the next 18 months. I should have paid way more attention to the growing risks of extended strike action by Royal Mail employees. These strikes have sent Royal Mail plunging into loss — although GDS, IDS’s international delivery arm is doing great.

I see two big lessons for me from this blunder. First, when buying dividend shares for their high yields, ensure that these cash payouts are solid and secure looking ahead. Second, steer clear of any company whose workforce is striking repeatedly for better pay and conditions.

That said, we intend to hold this and other dividend shares for the long term, not least because we expect much better times ahead for IDS and its earnings after a tough 2023!

The post Buying this popular dividend share in 2022 was a mistake! appeared first on The Motley Fool UK.

More reading

Cliffdarcy has an economic interest in International Distributions Services shares. 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 2022