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Back in November last year, investors in FTSE 100 index funds locked in a dividend yield close to 3.6%. And since then, they’ve enjoyed a pretty impressive 23% total return. With large-cap stocks reaching record highs, the last 12 months have been a good time to own UK shares. However, sadly, not all investors have enjoyed this rally.
WPP (LSE:WPP) shareholders have learned first-hand that just because the market goes up doesn’t mean all stocks follow. And for those who bought WPP shares a year ago have since seen 65% of their investment get wiped out. And while dividends have helped offset this loss, the stock’s still firmly in the red.
That’s obviously disappointing for current shareholders. But investors looking at the FTSE stock for the first time today might have stumbled upon a potentially lucrative income opportunity. That’s because the yield now stands at a staggering 11.2%!
So is this a passive income goldmine or a trap waiting to lure investors off the right path?
Always dig deeper
Screening stocks using their dividend yield is a popular way for income investors to uncover new opportunities. But sadly, it’s also a painful way to make mistakes. And looking at WPP, this business looks more like a trap than an opportunity, to me.
Why? Because WPP’s dividends have already been cut. In the group’s latest half-year results, the interim payout was slashed in half, from 15p per share to 7.5p.
At the same time, management launched a strategic review of the business to “drive sustainable growth supported by an appropriate level of financial flexibility”. In other words, the final end-of-year dividend’s likely also going to be taken down a notch. And if it’s the same 50% drop, that means WPP’s dividend yield’s actually closer to 7% not 11%.
Still worth considering?
A 7% payout’s still pretty substantial. So with more realistic expectations in place, could WPP shares still be worth considering right now?
The marketing media giant’s downfall is being driven by a combination of disruption fears from AI, as well as a wider pullback in advertising spend. These concerns have only been compounded by the loss of high-profile clients such as Coca-Cola. And looking at the latest quarterly results, investors are right to be anxious.
After a rough interim report that sent shares tumbling, revenue across the three months ending in September continued to move in the wrong direction. And subsequently, full-year guidance was once again revised downward, triggering another sharp sell-off.
While painful, it’s possible that investors may have overreacted. In the short run, WPP’s outlook seems rather bleak. But in the medium-to-long-term, things could be set to improve.
A new CEO’s been brought in to steer the ship, the company’s investing in its own suite of AI tools for customers to use, and while the loss of key clients is painful, the firm still has an impressive roster of blue-chip businesses to rely on once economic conditions improve.
The bottom line
So is WPP and its chunky dividend yield worth considering right now? Maybe. But the risk’s too high for me. That’s why this FTSE stock’s staying on my watchlist for now. Instead, I’m looking for other lucrative income opportunities.
