Buy Hold Sell: 3 dividend darlings (and 2 traps)

Ally Selby: Hello and welcome to Livewire's Buy Hold Sell. I'm Ally Selby, and today, we'll be taking a look at three of the market's favourite dividend stocks and for something a little bit different, none of these are iron ore miners. Plus, our guests will also be naming two stocks they think you should be steering clear of right now. To do that, we're joined by Plato's Pete Gardner and Merlon's Andrew Fraser.

Okay, first up today we have Telstra. It's a bit of an investor favourite and has a dividend yield of around 5%. Andrew, I'm going to start with you today. Is it a buy, hold or sell?

Telstra (ASX: TLS)

Andrew Fraser (SELL): Ally, Telstra's a sell for us, for a number of reasons. It's struggled to grow its revenue in line with inflation over the last decades. It's a low-growth business. The other big red flag for us is that it actually only converts about 50 cents in the dollar of reported accounting earnings. It's got very low cash conversion. Mobile margins are at record highs, which is very high relative to their peers and certainly high by global standards. The fixed business is in decline post the NBN rollout. Having said that, it has underperformed by quite a bit recently, so we are doing some more work on it, but it's definitely a sell for us at this point.

Ally Selby: Speaking of that underperformance, its share price has fallen around 20% over the past 12 months, which has to be painful for a lot of its shareholders. Over to you, Pete, is it a buy, hold or sell?

Peter Gardner (SELL): It's a sell for us. We agree with everything Andrew said. In terms of its yield, it's 5%. So if you think the market's going to fall significantly, Telstra's probably not going to fall as much as the market, but it's just too expensive given the growth prospects in the business going forward.

Woolworths (ASX: WOW)

Ally Selby: Okay. Next up we have Woolworths. It's a bit of a controversial stock right now. A lot of work needs to be done to rebuild trust. Staying with you, Pete, is that one a buy, hold or sell?

Peter Gardner (SELL): It's a sell for us as well for similar reasons to Telstra. It's multiple's just too high for the growth prospects in the business. It's obviously a very defensive business, but in the current regulatory environment, it's very hard to raise prices or increase your margins when the government's actively making Senate inquiries into you. We think it will struggle at the moment. So sell for us.

Ally Selby: It has a dividend yield of over 3% and its share price has fallen around 17% over the past 12 months. Andrew, over to you. Is it a buy, hold or sell?

Andrew Fraser (BUY): Woolworths is a buy for us. Yes, there are issues around the market structure. Yes, there are risks around social licence and the recent government inquiry does highlight that they can't gouge their customers. I think also as well, in terms of market share, they have lost, in recent times, some market share to Coles, but what you find is that the market sin bins either one of those players, depending on which quarter's sales are winning or losing.

Over the long term, Coles and Woolworth account for roughly two-thirds of the supermarket industry, so it's got a good industry structure, and there's no reason why market share over the long term should shift demonstrably in favour of Coles over Woolworths. The market is probably concerned about the CEO's departure. Normally, market participants get worried about CEOs leaving a business. We think in this case, it's probably less of a risk, and so it's a buy for us.

JB Hi-Fi (ASX: JBH) 

Ally Selby: Last up today, we have JB Hi-Fi. It has a dividend yield of around 4.6%, and it's seen its share price rise around 35% over the past year. Andrew, last one for you today, is it a buy, hold or sell?

Andrew Fraser (BUY): JB Hi-Fi is a buy for us, notwithstanding the performance over the last 12 months and the growing clouds over the consumer and what that might mean for their business in the short term. They're a fantastic retailer with a long track record of growing market share and in particular, growing market share when the economy and the consumer are doing it tough. It has a strong balance sheet, and a net cash position, which is a great position to be in in an economic downturn. So it's a buy for us.

Ally Selby: Okay. Over to you, Pete. Is JB Hi-Fi a buy, hold or sell?

Peter Gardner (BUY): Agree with Andrew on this one. We've got it as a buy. The other thing to note about JB Hi-Fi is that while they're in the consumer discretionary sector, I consider them more of a consumer staples stock these days, especially the electronics part of their business. If you look at what people are going to cut their spending on when the economy suffers, I think we all still need our new phones, and that's a pretty constant upgrade cycle that we're in. And so I think that's one of the reasons why their earnings have been far more stable than necessarily the economic environment would suggest. And so we actually think their PE should be closer, maybe not the same levels, but closer to Woolworths and Telstra, and that's why we've got it as a buy.

Ally Selby: Okay. We asked our guests to bring along an income stalwart that just could be a dividend trap. Pete, I'm going to start with you today. Which stock do you think investors should be avoiding right now?

Peter Gardner's dividend trap: Bank of Queensland (ASX: BOQ)

Peter Gardner (SELL): Bank of Queensland. We've got that as a sell at the moment and a dividend trap. We think, in the banking sector, scale is everything. You've got to spend money on IT and systems, and the smaller number of customers that you've got, the greater that spend is on a relative basis. We think the benefits of scale are huge in the banking sector, so the regional banks are continuing to struggle. So even though Bank of Queensland has a good yield at the moment, it's a sell for us.

Ally Selby: Okay. Over to you, Andrew. Which stock do you think could be a dividend trap?

Andrew Fraser's dividend trap: Commonwealth Bank (ASX: CBA) 

Andrew Fraser (SELL): I'll take a similar tack within the banks, but I'll go with one that I think features in a lot of dividend portfolios, which is Commonwealth Bank - but valuations are stretched across the major banks in general. They have benefited from rising interest rates in a benign bad debt environment, but it's the valuation component that is the area of concern for us. At the moment, there are some offsetting benefits that may support earnings in the short term, and ultimately, we don't think dividends will get cut in the near term with tax cuts coming. However, we do feel that the valuations on all metrics are just overstretched and don't really offer an attractive risk reward.

Ally Selby: Well, that's all we have time for today. I hope you enjoyed that episode of Buy Hold Sell as much as I did. If you did, why not give it a like? Remember to subscribe to our YouTube channel, we're adding so much great content just like this every single week.