I would like to digress this week from my mission to cover world markets.
It is a most important digression – ‘beware the dividend traps or, in other words, beware fool’s gold.
With share pieces plummeting, and for most companies no revision of dividends, it stands to reason that dividend yields would be, well, ‘suss’. The word means suspicious, and it is aptly used.
Dividend yield is a percentage ratio of dividend, divided by the company’s share price. As prices fall and there is no change to dividend, yield increases. As we know too well, equity prices are falling and dividend yield is increasing. To many these dividends now appear very attractive. Many investors take yield into account when making investing decisions.
One of the shortcomings of relying on fundamental data such as dividend is that it is mostly out of date. In the case of yield the data can be misleading by as much as 12 months. Data is historical and thus backward looking. I am not saying it is useless but that it should be read with come caution.
As we approach reporting season, expect some earnings surprises in which we will see downward revisions of profits and thus dividends. Many companies may try the old trick of maintaining dividend in the hope that there will not be a further sell down of its share price. Of course, we can say with near certainly that such stocks have already been sold down. The Instos who are closer to the action than the average retail investor will have sensed that all is not right and quietly started to sell.
One of the concerns for companies maintaining the same dividend on a falling profit is that the ‘payout ratio’ can rise beyond maintainable levels. At some point there will be a day of reckoning.
As they say – if it sounds too good to be true, it probably is.
Enjoy the ride