3 potential dividend yield traps you should watch for

  • October 28, 2020 09:10 PM AEDT
  • Kunal Sawhney
    CEO Kunal Sawhney
    2781 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

3 potential dividend yield traps you should watch for

Summary

  • High-yielding dividend stocks seem to be on top of the list for many income-seeking investors.
  • However, investors should also conduct due diligence on a forward-looking basis since dividends will be paid out of future cash flows.
  • In a low interest-rate world, the demand for sustainable dividend-paying companies is increasing. It is advisable to conduct a thorough assessment of companies since dividend payment to equity shareholders is not an obligation for Boards.
Gold MTF non-AMP

Dividend yield, as a backward-looking measure, indicates the percentage of the current stock price paid as dividends over the stock price. It does not guarantee that a Company is certainly going to pay the amount over the future. 

Since dividend yield is a function of stock price relative to the dividend paid over the past year, the relationship between stock price and its dividend yield is inversely correlated. 

When the price of stocks rise, dividend yield falls and vice-versa. Put another way, dividend yields are at higher bound levels, often due to the downward trend in the share price of a Company. 

Investors typically sell stocks when the expectations or assumptions are negatively impacted by exogenous and endogenous factors, thus causing a drop in the perceived intrinsic value for an investor.

Likewise, when expectations are rising primarily due to underlying changes in the factors, investors tend to be comfortable paying a higher price, given a rise in perceived intrinsic value. 

Let us look at some well-known stocks that are high yielding. 

Whitehaven Coal Ltd (ASX:WHC)

According to ASX, the stock is currently yielding almost 32%. The Company was impacted heavily by the pandemic as coal prices crashed, owing to a fall in demand. 

FY20 Underlying EBITDA fell to A$306 million compared to A$1,041.7 million in FY19. This is primarily driven by a decrease in global COAL Newcastle Index price and SSCC prices, increased costs, and decreased sales volumes. 

Operating cash flows came down to A$146.4 million vs A$916.5 million in FY19. Unit cost per tonne increased to A$75 against A$67 in FY19. Falling commodity price was the main reason behind falling underlying EBITDA with an impact of A$621 million. 

Owing to a strong result in the September quarter, the Company has upgraded its cost outlook.

On 28 October 2020, WHC last traded at A$0.975, down by 1.016% from the previous close. 

Flight Centre Travel Group Limited (ASX:FLT)

The FLT stock is currently yielding around 11% according to the ASX. Flight Centre Travel swung into losses in FY20 as global travel demand came to a standstill in the wake of the pandemic. 

Travel and tourism remain one of the sectors where the uncertainty regarding return to normalcy remains paramount. International travel has been jeopardised, with businesses in the industry also facing bankruptcy.

In August, the Company released full-year results and noted that demand for international travel would not return to pre-pandemic levels until FY23 or FY24 in the absence of a vaccine.

FLT posted an A$849 million statutory loss before tax compared to A$343.5million profit before tax in FY19. The Company stated that travel restrictions continue to hamper demand.

On 28 October 2020, FLT last traded at A$11.95, down by 4.629% from the previous close. 

Bendigo and Adelaide Bank Limited (ASX:BEN)

According to ASX, the stock is currently yielding 9.67%. The banking sector is also one of the areas hit hardest by the pandemic. With economic contraction and mounting job losses, the risks of businesses going bankrupt, and households entering insolvency get higher. 

These risks ultimately translated to bad debts for banks. In FY20, statutory net profit was down by 48.8% to A$192.8 million compared to the previous year. BEN incurred COVID-19 provision of A$127.7 million. 

On 27 October 2020, the bank provided Q1 FY2021 update. It was highlighted that the bank is prudently managing net interest margins, which were up by one basis point over H2 FY20. Total lending continued growing with year-to-date growth of 11%. 

As of 16 October 2020, the value of customers’ accounts on deferred repayments was ~A$2.5 billion compared to A$6.9 billion in June.

On 28 October 2020, BEN last traded at A$6.700, down by 1.760% from the previous close.  

 


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