Image source: Getty Images
Investing in dividend stocks is one of my favorite passive income ideas. But, as investors are often told, past performance is not necessarily a guide to what may happen next. For example, last month, a well-known UK stock that had offered a double-digit percentage dividend yield abruptly canceled its payout entirely.
But I see reasons to think that the juicy dividend could return in the future. So should I add the stocks to my portfolio now in the hope of earning a handsome dividend in a year or two?
Shooting Star
The action in question is from an insurance and financial services group Direct line (LSE: DLG).
In a sense, the dividend cut shouldn’t have come as a surprise. The high yield offered before the announcement was a clue that at least some investors had doubts about its sustainability.
While the cancellation largely explains a 21% drop in stock price this year, it’s also down 39% from last year. Clearly Direct Line was losing popularity even while maintaining its dividend.
Business results had been shaky. Both revenue and profit fell in its most recent annual results. In November, he reported a decline in revenue for the first nine months of 2022, but said that, “outlook for dividend capacity remains unchanged”.
bull case
So it came as a shock that the company canceled its dividend just a couple of months later. After all, the main competence of an insurer is to detect risks in advance.
That reflected incompetent management in my opinion. The former CEO is gone.
But are things as bad as the cancellation suggests?
Direct Line remains solidly profitable. Cancellation of dividends means that the cash that the company would have used to pay them is kept within the business.
Demand for financial services is likely to be resilient. Direct Line has a strong brand that helps it attract customers. Its UK focus helps keep business simpler than global rivals.
It has shown in the past that it has the ingredients to be a consistently profitable business that can pay big dividends. I hope under the new management I can do it again. That could see the meaty dividend pick up next year if things go well.
bear case
However, are the company’s problems only due to the former CEO?
I question how effective the board of directors is, given the change in tone between November and January. No directors have taken advantage of the price drop since the January announcement to buy shares on a large scale (there have been some rather minor purchases as part of an incentive plan).
Direct Line experienced a 10.2% year-over-year decline in the number of policies in force in the first nine months of last year. That suggests the brand may have lost some of its luster.
Are these UK shares for me?
Longer term, I think Direct Line may have what it takes to get back to previous levels of profitability and dividends. If that happens, buying today for my portfolio could end up meaning I get big streams of income in the future.
But I’m not convinced that the company will necessarily recover anytime soon, if at all. It faces multiple challenges. I will pay close attention to its results next month, but I will not invest for now.
var config = {
apiKey: ‘1ed121d592e04642d57912bb369ef696621661a3’,
product: ‘PRO_MULTISITE’,
logConsent: false,
notifyOnce: false,
initialState: ‘NOTIFY’,
position: ‘LEFT’,
theme: ‘DARK’,
layout: ‘SLIDEOUT’,
toggleType: ‘slider’,
iabCMP: false,
closeStyle: ‘button’,
consentCookieExpiry: 90,
subDomains : true,
rejectButton: false,
settingsStyle : ‘button’,
encodeCookie : false,
accessibility: {
accessKey: ‘C’,
highlightFocus: false },
onLoad: function () { // hide Cookie Control recommended settings button.
var recommendedSettingsButton = document.getElementById(‘ccc-recommended-settings’);
if (recommendedSettingsButton) {
recommendedSettingsButton.classList.add(‘hide’);
} },
text: {
title: ‘Privacy Notice’,
intro: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
necessaryTitle: ”,
necessaryDescription: ”,
thirdPartyTitle: ‘Warning: Some cookies require your attention’,
thirdPartyDescription: ‘Consent for the following cookies could not be automatically revoked. Please follow the link(s) below to opt out manually.’,
on: ‘On’,
off: ‘Off’,
accept: ‘Accept’,
settings: ‘Cookie Preferences’,
acceptRecommended: ‘Accept Recommended Settings’,
notifyTitle: ‘Privacy Notice’,
notifyDescription: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
closeLabel: ‘Save Preferences and Close’,
accessibilityAlert: ‘This site uses cookies to store information. Press accesskey C to learn more about your options.’,
rejectSettings: ‘Reject All’,
reject: ‘Reject’,
},
branding: {
fontColor: ‘#fff’,
fontFamily: ‘Arial,sans-serif’,
fontSizeTitle: ‘1.2em’,
fontSizeHeaders: ‘1em’,
fontSize: ‘1em’,
backgroundColor: ‘#313147’,
toggleText: ‘#fff’,
toggleColor: ‘#2f2f5f’,
toggleBackground: ‘#111125’,
alertText: ‘#fff’,
alertBackground: ‘#111125’,
acceptText: ‘#ffffff’,
acceptBackground: ‘#111125′,
buttonIcon: null,
buttonIconWidth: ’64px’,
buttonIconHeight: ’64px’,
removeIcon: false,
removeAbout: false },
necessaryCookies: ( ‘wordpress_*’,’wordpress_logged_in_*’,’CookieControl’,’PHPSESSID’,’fivc’,’fivs’,’fivp’,’Ookie’,’Fool_subinfo’,’_gads’,’_gid’,’_gat’,’_ga’,’__utma’ ),
optionalCookies: (
{
name: ‘Sharing’,
label: ‘I would like content tailored to my personal preferences.’,
description: ‘We work with advertising partners to show you ads of products and services you may be interested in. You can choose whether or not to have ads delivered in a personalised way by setting this option. You can return to review this setting at any time by clicking the "C" logo in the bottom left corner of any page.’,
cookies: ( ‘_ga’, ‘_gid’, ‘_gat’, ‘__utma’, ‘_gads’ ),
onAccept: function () {
// Add Facebook Pixel
!function(f,b,e,v,n,t,s)
{if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;
n.queue=();t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)(0);
s.parentNode.insertBefore(t,s)}(window,document,’script’,
‘https://connect.facebook.net/en_US/fbevents.js’);
fbq(‘init’, ‘901682110316659’);
fbq(‘track’, ‘PageView’);
fbq(‘consent’, ‘grant’);
// End Facebook Pixel
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, true ) ;
},
onRevoke: function () {
fbq(‘consent’, ‘revoke’);
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, false ) ;
},
recommendedState: ‘on’,
lawfulBasis: ‘consent’,
},
),
statement: {
description: ”,
name: ”,
url: ‘https://www.fool.co.uk/help/privacy-and-cookie-statement/’,
updated: ”
},
};
CookieControl.load(config);
