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As a veteran value/income/dividend investor, I prefer stocks that offer high dividend yields. Currently, there is no shortage of candidates of this type in the FTSE 100 and FTSE 250.
FTSE falling
However, the UK stock market is not off to a great start in 2023. Since December 29, the Footsie is down 3.5%, while the FTSE 250 has lost 4.2%.
On the other hand, when stock prices fall, this can increase dividend yields, making cash returns on stocks more attractive. But this all depends on whether companies will continue to make these cash payments in the future.
For example, let's take the shares of the FTSE 250 company. Close Brothers Group (LSE: CBG), whose share price has taken a hit this month. Close is a mid-sized player in UK commercial banking, commercial and consumer lending, wealth management and securities trading.
At their 2023 high, Close shares hit 1,139p on 6 January 2023. On Friday (19 January) they closed at 597.5p, valuing the group at £899.2m. They also hit a 52-week low of 593p on Friday.
The stock has plummeted sharply, falling 24.9% so far this year, while also losing 36.4% of its value in one year. Worse yet, the share price has plummeted 60.6% in five years.
Delicious dividends
It's important to note that the above losses exclude dividends, which are considerable for Close. The full-year payout for 2022-23 was 67.5 pence per share, on top of 66 pence for 2021-22 and 60 pence for 2020-21.
In other words, if Close made the same cash payment this financial year, then his shares would return a whopping 11.3% annually. To me, that sounds delicious. But there may be a problem.
Decades of investing have taught me that double-digit dividends rarely last. Either share prices rise or dividends are cut, reducing cash returns. And a cut could be on the cards at Close.
What happen?
The shares trade at a multiple of 11 times earnings, which represents a return of 9.1%. But this is only enough to cover four-fifths of the annual dividend yield of 11.3%. In the end something will have to give.
However, an even bigger concern is that Close is a major player in car finance, an area that has recently come under scrutiny by the regulator, the Financial Conduct Authority (FCA).
The FCA is concerned that car dealers have been fraudulently selling finance to borrowers. I absolutely know this happened as I worked in this sector for 15 years and was also the main whistleblower in the Payment Protection Insurance (PPI) scandal.
Given my insider knowledge of this industry, I suspect that millions of car buyers could receive billions of pounds in compensation for mis-selling. This would be a blow to major British banks and lenders, including Close.
Finally, something strange happened last week, as Close did not release its second-quarter trading update scheduled for Friday.
For the record, my wife and I purchased Close shares in August 2023 at 833.4 per year and are suffering a 28.3% paper loss year to date. Despite these setbacks, I intend to keep our bet until the situation becomes clearer. But if the next news is bad, you might have to sell!
