Not all dividends are created equal… here’s how to sort through them

Fri 10 May 24, 1:00pm (AEST)
Cash savings money in a jar
Source: Shutterstock

Key Points

  • High yields are historical – what was elevated last year may not be guaranteed today, and future performance can differ
  • Investors should consider both past yield consistency and expected future yields, focusing on the 1-year forward yield predictions.
  • Effective investing weighs total returns, recognising dividend yield can be offset by poor share price performance.

Investors, understandably, are often attracted to big numbers. Think about the introductory rate on a high-interest savings account. It's usually pretty good for the first three months and then drops through the floor thereafter. Think about the low-rate “NINJA” (no income, no job, and no assets) home loans of the GFC era, which reset higher and nearly destroyed capitalism as we know it.

It’s no different when it comes to high-yielding stocks. We’re attracted to the big numbers, but, as always, there are some very important things to consider if you are going to invest.

First and foremost, any yield you see is historical. So, while it might be high, you are not going to earn that yield. It’s already been and gone and while it might give you some guide as to future yields, that’s certainly not always the case.

You need to look at yield history - was the big recent number consistently achieved in the past, or was it a one-off? You also need to look at the 1-year forward yield – this is the yield that analysts expect the company to pay next year – this is the one that matters because it’s what you potentially stand to receive if you buy the company today (and even then, it's subject to change).

The other important consideration is how the stock has performed over the past year. There is no point earning a 15% yield, for example, if the share price is down 20%. You’d have been better off putting your money in one of those high-interest savings accounts mentioned earlier – even if the introductory rate falls through the floor after three months.

Source: Market Index

Based on the latest Market Index highest dividend yield scan, only seven of the top 20 stocks have had both a high yield and a positive 1-year return in the share price. If you add in 1-year forward yield (data sourced from FactSet), that number drops to just three names (although there was no forecast data for NBI, MOT, MXT and QRI).

So, which three stocks make the cut?

image (1)
Source: Market Index

Helia Group (ASX: HLI)

HLI 12-month share price (Source: Market Index)

Yancoal (ASX: YAL)

YAL 12-month share price (Source: Market Index)

Magellan Financial Group (ASX: MFG)

MFG 12-month share price (Source: Market Index)


Written By

Chris Conway

Managing Editor

Chris is the Managing Editor at Livewire Markets and Market Index. His passion is equity research, portfolio construction, and investment education. He is also very keen on the powerful processes that can help all investors identify great opportunities and outperform the market, and wants to bring them to life and share them with you.

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