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Why I would avoid these dividend shares

When it comes to dividend shares there certainly is a lot of choice on the local market.

But it is worth remembering that not all dividend shares are equal. With that in mind, here are a couple of dividend shares that I would avoid:

iSentia Group Ltd (ASX: ISD)

This media monitoring company’s shares currently provide investors with a trailing partially franked 4.6% dividend. However, I feel there is a strong probability that it will be forced to cut its dividend significantly in FY 2018. With its core business struggling due to revenue pressures from higher levels of customer churn, management expects EBITDA to be down 22% this year. I don’t think its balance sheet is strong enough to maintain its dividend, so I expect a cut in-line with its fall in earnings. This would reduce its forward yield to 3.5%. Furthermore, it is worth remembering that there is no guarantee it will return to growth in FY 2019.

Retail Food Group Limited (ASX: RFG)

Like iSentia, it seems inevitable that Retail Food Group will have to make a significant cut to its dividend this year. Which is a big shame because over the last decade it has been one of the biggest success stories in the dividend space, increasing for ten successive years. Statutory net profit after tax is expected to be less than $22 million in the first-half of FY 2018. This will be a decline of at least 35% on a year earlier. Considering its high levels of debt (approx. $250 million) and the debt covenants it must abide by, I think its dividend could fall by as much as half in FY 2018.

Overall, I think investors would be best avoiding iSentia and Retail Food Group. Instead, dividend shares such as Greencross Limited (ASX: GXL) and Super Retail Group Ltd (ASX: SUL) might be better options.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Greencross Limited and Retail Food Group Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. The Motley Fool Australia has recommended iSentia Group Ltd. 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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