Should you buy these 2 dividend shares for their 10% yields?

One of the easiest ways to compare shares is to look at their dividend yields, of course if you want to beat the market that probably isn’t the best way to do it.

But, for people with a fixed amount of capital a 2% yield difference could mean the difference between a modest life and more luxurious life.

So, are the following shares worth buying for their huge yields?

WPP Aunz Ltd (ASX: WPP)

WPP Aunz is the Australian-listed local version of UK-based advertising giant WPP. The key to WPP Aunz is its advertising and media segment, which grew revenue by $24.1 million in the 2017 result. However, all of its other segments including the branding & identity segment saw revenue fall.

The key statistics for every investor to consider are the net profit and earnings per share (EPS). Profit before tax increased by 3.1% and EPS also increased by 3.1%. It was this growth that allowed the business to grow the dividend by 5%, which only represented a dividend payout ratio of 64%.

Advertising is very important for businesses these days, particularly with so many different channels that a business could use. WPP Aunz could continue to achieve a small amount of growth each year, leading to a slightly-growing dividend.

WPP Aunz is trading at 9x FY18’s estimated earnings with a grossed-up dividend yield of 10%.

Telstra Corporation Ltd (ASX: TLS)

Telstra is Australia’s largest telecommunications company. Dividend investors have long been attracted to the yield Telstra offers, but it hasn’t been so strong in recent times as the dividend has been cut to 22 cents per share and could go even lower.

The key consideration for Telstra is which way the earnings will go. It’s good that the new(ish) CEO Andy Penn has shifted the dividend policy to a percentage of earnings, but now if the earnings drop the dividend could keep dropping.

If 5G, the Internet of Things and automated cars turn into profit machines for Telstra then today’s price could be a good long-term buy. However, investors are faced with unquantifiable future positives and the very-obvious current negative of the NBN which is shrinking profit margins.

Telstra is trading at 10x FY18’s estimated earnings with a grossed-up dividend yield of 10.1%.

Foolish takeaway

Dividend yields around 10% or higher are inherently risky for one reason or another. Neither of these businesses are going to shoot the lights out, but if they’re able to very slowly but steadily growing their earnings and the dividend over the next five years then they could be good dividend stocks.

I wouldn’t personally buy either of them, as very-high yield stocks isn’t my type of investment, but I could understand if yield-chasers wanted to buy them at the current levels.

My type of dividend investment is this top income stock which is currently growing its dividend by more than 20% each year.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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 Scott Phillips.

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