Should you buy SKY Network Television Limited for its near 9% yield?

Examining the highest yielding stocks on any listed market should give investors a reason to first pause and think.

Why is the yield so high? Are there risks with a significant cut to the dividend or is it really that easy to just go ahead and buy shares with the expectation you’ll be showered with cash?

As well all know, yields are merely a ratio of dividends to share price and a high yield can arise due to rising dividends or a falling share price (or even falling dividends where the share price falls further). Whichever way a high dividend yield presents itself though, investors should at least be cautious and do a little due diligence on the proposed purchase.

Consider SKY Network Television Limited (ASX: SKT).

Sky is New Zealand’s premier pay-television operator and distributes both local and international viewing content to its subscribers through a digital satellite network. As well as this it also sells on-demand video (streaming) via its NEON brand.

However, the company is facing some competitive headwinds in the form of streaming services such as Netflix, Spark New Zealand Limited’s (ASX: SPK) Lightbox product and TV New Zealand’s on-demand services.

In short, competition is getting tougher which is perhaps why Sky and Vodafone have decided to merge their operating businesses in New Zealand. A strategic form of diversification perhaps?

Sky needs to do something. There’s been no growth in revenue and net profit since 2014 and the dividend paid to shareholders has risen a measly 3% or so in the last three years — a growth rate that’s very hard to get excited about.

The Vodafone merger could be a catalyst for better times ahead, but it’s hard to say with any degree of certainty what this will mean for shareholders as revenue and EBITDA growth are forecast to be flat between now and the end of the 2018-19 financial year. It’s no wonder then that the total ‘return’ that shareholders have endured has been a negative 17% per year compound.

Because of the challenges the company is facing, I’d be more inclined to put my money into stocks that pay a lower dividend yield, but perhaps come with more certainty and some growth (more is always better if you can find it). You could consider buying shares in companies like Brickworks Limited (ASX: BKW), Magellan Financial Group Ltd (ASX: MFG) and even a listed company like Argo Investments Limited (ASX: ARG).

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Motley Fool contributor Edward Vesely has no position in any stocks mentioned. 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.

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