2 dividend stocks I wouldn’t touch with a bargepole

Jolly Roger pirate flag

Dunelm Group (LSE: DNLM) cheered the market last week with the release of a better-than-expected pre-close trading update, although the fanfare has evaporated pretty rapidly since.

While the Leicester firm saw like-for-like sales declining 0.5% in the year to June 2017, a sharp improvement in the fourth quarter prompted some investors to believe the worst may be over. Dunelm saw underlying revenues rise 3.8% during the 13 weeks to July 1.

Shops struggling

Signs of growing stress on the high street has been a millstone around the company’s stock value for more than a year now. Indeed, the Dunelm Mill owner has seen its share price lose around a quarter of its value during the past 12 months, and it fell to levels not seen since 2012 just this week.

Despite an increasingly troubled outlook for the British retail sector however, the City expects Dunelm to bounce from a predicted 12% earnings decline in fiscal 2017 with a 12% rise in fiscal 2018.

But I find this hard to fathom as economic indicators in the UK continue to deteriorate rapidly. While the BDO announced last week that high street takings rose at the strongest rate for six years in June, this was helped by a particularly-insipid performance a year earlier.

Indeed, for the large part, consumer data has worsened in recent months. And a steady decline in real wages suggests that the storm clouds are getting ever-darker. The latest ONS data showed pay adjusted for inflation fell 0.6% during the three months ending April, the largest drop for three years.

Perilous projections

I believe the chance of current earnings projections for Dunelm undergoing serious downgrades in the months ahead is not reflected by a forward P/E ratio of 13.9 times. Rather, a figure below the bargain watermark of 10 times would be a fairer reflection of the firm’s high risk profile.

And I reckon the company’s fragile sales outlook, combined with its escalating debt pile could also cause dividend projections to fall by the wayside. The furniture giant expects net debt to have risen to £127m as of June from £79.3m a year earlier.

The retailer is currently expected to raise the payment to 26.9p per share from an estimated 25.4p in the last fiscal year, meaning Dunelm sports a sizeable 4.3% dividend for fiscal 2018, but it still seems expensive to me.

No home comforts

I believe share pickers should scorn heady dividend estimates at Topps Tiles (LSE: TPT) too as, like Dunelm, the company could come under sustained pressure should discretionary spending on projects like interior decoration continue to falter.

The City is already predicting a 9% earnings slip in the period ending September 2017. Still, this is not expected to harm Topps Tiles’ progressive dividend policy — a 3.7p per share reward is currently predicted, up from 3.5p last year and yielding 4.4%.

And an estimated 6% earnings improvement in fiscal 2018 should drive the dividend to 4.3p and the yield to 5.2%, according to the boffins.

I do not share the Square Mile’s faith however, and I will not be piling in anytime soon, even in spite of Topps Tiles’ forward P/E multiple of just 10.3 times.

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Royston Wild has no position in any 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.

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