2 lucrative dividend shares facing big risks

Over the past year or more, shrewd investors have been looking outside the previous dividend darlings like Commonwealth Bank of Australia (ASX: CBA) and BHP Billiton Limited (ASX: BHP), accurately perceiving the structural risks around these companies.

However, simply looking to a non-banking or non-mining stock doesn’t mean that you’re guaranteed a risk-free income stream. Here are two companies outside these sectors that I believe face a significant risk to earnings and/or share prices:

Scentre Group Ltd (ASX: SCG) is the property developer behind a number of successful shopping centres in Australia. Shares have risen nearly 50% from their nominal launch after the restructure of Westfield Group on the back of strong performance, rising sales and a very high occupancy rate – and therein lies the rub.

With full occupancy (99.5%), Scentre has very little scope to improve its ongoing operations and management is targeting 2%-2.5% increases in Net Operating Income per annum. Although we still seem to be looking at interest rate reductions, rate rises would begin to nibble into already anaemic company growth.

Furthermore, if the domestic economy is slowing and investors might assume that it is if interest rates keep falling then there is a question mark under ongoing sales growth. Lower rates can lead to higher discretionary spending, true, but rising unemployment and falling property values would likely impact sales at Scentre Group’s retailers. This would place downward pressure on rents, and potentially increase vacancy if retailers need to close stores.

Scentre Group is a great business, but to me it looks fully valued and with more risk of downside than upside for investors expecting the Australian economy to worsen.

Lifehealthcare Group Ltd (ASX: LHC) is a middleman supplying medical devices both complex and simple to hospitals and surgeons. Recent growth has been driven by acquisitions in the fragmented sector, as well as growth in the sales of higher margin, more complex equipment. However, the company’s recent operational performance was sub-par, as expenses grew faster than revenue. Shares fell heavily on the news, and Lifehealthcare now offers an annual yield of more than 6%, if the interim dividend is doubled to represent full-year earnings.

That’s an attractive yield, and in combination with the defensive nature of the healthcare sector, might ordinarily be enough to make investors look through Lifehealthcare’s recent woes. However, I believe there is an even bigger threat looming in the form of potential regulatory changes to the health insurance system, particularly the fitting of prosthetics.

The cost of fitting these devices has been described as ‘Alice in Wonderland stuff’ by a prominent health insurance fund, and Medibank Private Ltd (ASX: MPL) along with other insurers is agitating for changes in the system. Any regulatory change is highly uncertain – which is why I continue to hold my shares – but investors should be wary of the potential for today’s earnings to be impacted further.

Looking for rock solid dividend stocks with growing yields?

Forget Lifehealthcare and Scentre Group. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool contributor Sean O'Neill owns shares of LifeHealthcare Group Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.