Dividend stocks usually provide regular cash streams to investors. In a country like Australia, where the interest rates are kept very low, high dividend yield stocks are very popular among investors.
Although dividend stocks are considered as less risky investments, there are several reasons why investor must not invest in high dividend yield stocks.
Reasons Why investors must not invest in high dividend yield stocks
Inflated Dividend Yields- Generally, high dividend yield stocks pay good returns to its shareholders in the form of dividends. However, this might not happen with every high dividend yield stocks. Sometimes, stocks do carry inflated annual dividend yields, influenced by the sudden drop in the stock price.
As annual dividend yields are calculated by dividing the annual dividend by the current share price of the company, any negative news or update regarding a company can cause a sudden decrease in the stock price which can inflate an annual dividend yield.
Hence, dividend yield analyses should not be the only criteria for screening stocks. Rather, investors should take a more holistic approach while selecting a stock. This will include looking at the fundamentals and different technical aspects of a stock.
High Dividends at the cost of the company’s growth - A dividend is a share of a company’s profit that is paid to the shareholders. Dividends are not reinvested in the company for growth or any other purpose. This means that if a company is paying a large amount of dividends to make its shareholders happy, it is coming at the cost of the company’s growth. Meaning, there are less chances that the company will grow in the future as large amount of money paid to shareholders rather than for growth. We understand that it is very important to make shareholders happy, but it should come at the cost of the company’s growth.
Hence, investors should always look for companies that follow balanced approach in declaring dividends.
Dividend Yield and Total Return - If a stock has a high dividend yield, this does not necessarily means that it will pay a good return or will increase shareholders total value. For example:
Alumina Limited (ASX: AWC) - As at 30 August 2019, the stock of Alumina Limited (ASX: AWC) was trading with an annual dividend yield of 12.31% (as per ASX). However, if we look at the stock performance of this company, the stock has provided a negative return of 25.09% in the last one year and -16.86% in the last six months.
At market close on 30 August 2019, AWC’ stock was trading at a price of $2.170 with a market capitalisation of $6.11 billion.
Exclipx Group Limited (ASX: ECX) - Likewise, the stock of Exclipx Group Limited (ASX: ECX) was trading with a high dividend yield of 10.6% (annual) as on 30 August 2019 (as per ASX), however, in the last one year, the stock price of the company has declined by 43.45%. In the last six months, the stock has provided a negative return of 23.74%.
At market close on 30 August 2019, ECX’ stock was trading at a price of $1.605 with a market capitalisation of $482.65 million.
Speedcast International Limited (ASX: SDA)- The stock of Speedcast International Limited (ASX: SDA) has a high annual dividend yield of 9.54%, however, on a stock performance front, SDA’s stock has provided a negative return of 80.98% in the last one year.
At market close on 30 August 2019, SDA’ stock was trading at a price of $0.775 with a market capitalisation of $181 million.
Bank of Queensland Limited (ASX: BOQ) - This Australian bank is currently having an annual dividend yield of 7.91% as on 30 August 2019. However, on the stock performance front, this bank has provided a negative return of 21.01% in the last one-year time period.
The most recent dividend BOQ declared was of 34 cents for H1 FY19. This was lower than the previous half.
BOQ Dividend History (Source: Company Reports)
The first half cash earnings were 18% lower than pcp while the net profit was down by 10% on pcp.
Despite this, BOQ is among the top performers in terms of dividend yield.
There is no denying that, dividend stocks offer safe and reliable opportunity for investors to regular cash streams. And there are various dividend stocks which have successfully provided good dividend while increasing the total shareholder value.
Dividend stocks Providing Good Returns
Rio Tinto Limited (ASX: RIO)- Leading metal and mining company, Rio Tinto Limited (ASX: RIO) is currently having an annual dividend yield of 5.49%. For six months ended 30 June 2019, the company declared an ordinary dividend of US 151 cents, up 19% on pcp. Not only that, in the last one year, the company’s stock has provided return of 21.81%. This is a classic example of how a company can provide decent dividends while increasing the shareholders value.
At market close on 30 August 2019, RIO’s stock was trading at a price of $87.580 with a market capitalisation of circa $31.81 billion.
Harvey Norman Holdings Limited (ASX: HVN) - The stock of Harvey Norman Holdings Limited (ASX: HVN) has an annual dividend yield of 6.42%. In FY19, the company witnessed an 8.4% growth Reported Profit Before Tax (PBT) and 4.5% growth in its Earnings per share. The company declared a Final Dividend of 21.0 cents per share which was 23.5% higher than the previous year.
On the stock performance front, the stock has provided a return of 26.55% in the last one year. At market close on 30 August 2019, HVN’s stock was trading at a price of $4.380, close to its 52 weeks high price of $4.770.
Although there are many dividend stocks which can be considered as safe and reliable investments, investors should not rely solely on dividend yield analyses to judge performance of a stock. Rather they should also see the overall shareholder return as well as fundamental and technical information about the company.
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