Every month I invest in the stock market in a bid to increase my passive income. I try to find dividend shares that I think are well-placed to increase their payouts in the years ahead.
Naturally, not all stocks I consider will win me over. Quite the opposite, in fact.
Here are two dividend-paying UK shares that I’m avoiding like the plague right now.
A FTSE 100 wealth-shredder
Right now, the dividend yield of BT Group (LSE: BT.A) is 7.4%. On paper, that looks enticing.
However, a quick glance at the history of the payout tells me I should exercise extreme caution.
Financial year
Dividend per share
2024 (forecast)
7.50p
2023
7.70p
2022
7.70p
2021
0.0p
2020
4.62p
2019
15.4p
1986/87 (as British Telecommunications)
8.45p
To be fair, the prospective dividend for this year is covered 2.5 times by trailing earnings. That suggests a solid margin of safety.
However, at the end of September, the company’s net debt position was £19.9bn — nearly double its market cap! In the words of Scooby-Doo as he wheels away in terror, “Yikes!”
Meanwhile, there is growing competition in the UK broadband market from alternative network providers (or ‘altnets’) such as CityFibre. These are taking volumes and limiting the pricing power of BT’s Openreach.
UBS thinks the telecoms giant will have to spend more to compete, threatening the dividend moving forward. “We assume [the dividend per share] halves to 3.85p,” the bank said, citing higher capital expenditure and pressure on cash flow.
Now, this doesn’t mean BT will turn out to be a poor investment from 104p today. Despite UBS’s bearishness, analysts’ consensus target stands at 178p, a whopping 71% above the current share price.
This suggests the stock is significantly undervalued. However, that has been the case for as long as I can remember. And over this time, BT just keeps shedding more and more market value.
Indeed, the share price has now fallen 70% in 10 years!
I just don’t think the telecoms industry – and BT in particular – is an attractive place to invest my money.
Huge ongoing capital requirements, low growth, and increasing competition are unlikely to change the long-term picture here, in my view.
A FTSE 250 free-faller
The second dividend-paying stock I’m avoiding is Dr Martens (LSE: DOCS). Again, in theory, the juicy 8.6% dividend yield looks lip-smacking. It’s more than double the FTSE 250 average.
However, this high yield is due to a 12-month share price plunge of 58% rather than bumper dividend hikes.
The bootmaker only started paying dividends in 2022, but that short record already looks in danger after the firm just issued its fifth profit warning in three years.
For this financial year (which has just started), the firm’s worst case scenario is for pre-tax profit to be just a third of last year’s £159m. And operating margins are under serious pressure.
Granted, the economic backdrop is challenging for most retailers. So it’s perfectly possible that sales could quickly pick back up once consumers have a bit more cash to spare.
Additionally, Dr Martens has announced that CEO Kenny Wilson will be succeeded by chief brand officer Ije Nwokorie. Perhaps he can freshen things up.
However, it’s common for new management to reset (or even cancel) the dividend of a struggling company. I fear this is on the cards here. So I’m investing my money elsewhere.
The post 2 dividend shares I wouldn’t touch with a bargepole in today’s stock market appeared first on The Motley Fool UK.
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Ben McPoland 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.
