A few years ago I wrote about shopping for dividends. Let’s revisit that concept in relation to today’s market…
Traditionally, high yielding shares have been buffered from a downturn in the sharemarket. This is because dividends are usually paid regardless of whether the sharemarket rises or falls. Usually when the sharemarket falls, dividends can act as a buffer against losses in the share price.
High dividend yields happen either because the dividends actually increase or because the share prices fall.
Right now some of the highest yields come from companies which own energy infrastructure such as gas pipelines. Examples include:
These businesses typically have stable cash flows but very high levels of gearing. That means if borrowing costs rise or we have another credit crunch, distributions from these companies could come under pressure.
Retail companies are starting to offer attractive yields due to a fall in share price. This sector is being impacted by a lack of consumer spending due to the effects of the government stimulus wearing off.
But with the jobs market expected to remain strong, there could be a turnaround next year.
Examples of high yielding retail companies include:
Dividend yields are historical. Which means you need to keep in mind that old adage you may have heard…that past performance is not an accurate predictor of future performance.
So to re-cap, if you are interested in dividends from your shares, here’s a checklist of things to look out for:
Income investing is more than sourcing high dividends. It’s also about finding a sustainable dividend.
Dividend payout ratio is one way that we can measure the sustainability of dividends. It measures the dividends as a portion of earnings.
Generally a payout ratio less than 100% is desirable. Be careful of a payout ratio greater than 100% because it means that the dividend is not sustainable given the conditions which are prevailing at the time.
You need to make sure that the company that you are investing is maintaining profit or growing profit so that you can get your dividends. Often if companies get into a rough patch, they will start to cancel dividends.
You want to see forecast earnings growth as at least steady if not positive.
Be careful if you see negative earnings growth being forecast as this can be a precursor to dividend payments being reduced or cut altogether.
The great thing about income investing is that you get money whether the market is going up or whether it is going down. Hence income investing can act as a buffer against losses when the market is going down. Income stocks tend to come into fashion in a sideways and falling market.
All in all, the sharemarket can be one of the most tax-effective places to make capital and get income. At the end of the day, you not only want income from your shares but also capital growth so don’t forget to also research the underlying company.
Happy trading!
Julia Lee Equities Analyst Bell Direct Have you started trading with Bell Direct for just $15 a trade? Register now for free.