Invest
Four things to know when seeking sustainable dividends
It’s tempting to simply rely on historic dividend yields, but it takes a deeper look to identify sustainable dividends, AMP Capital has said.
Four things to know when seeking sustainable dividends
It’s tempting to simply rely on historic dividend yields, but it takes a deeper look to identify sustainable dividends, AMP Capital has said.
For example, companies in the top 10 per cent of expected dividend yields, on average, deliver not only negative earnings growth but also negative dividend growth while underperforming the market over time, AMP Capital equity income expert Dermot Ryan explained.
That’s according AMP Capital analysis.
“Low returns, volatile earnings, poor momentum, high payout ratios and the use of borrowing to finance dividends – these are all telltale signs a company’s dividends are unsustainable, but some of these factors aren’t immediately apparent until you scratch the surface,” Mr Ryan continued.
“Listed company executives know there’s high demand for income given the number of retirees investing in the share market at the moment looking to generate income.
“Historically low interest rates mean returns from cash holdings aren’t enough to ensure savers are keeping ahead of inflation,” he added, observing that while some companies will give investors what they want to attract investors and stimulate demand, companies without sufficient earnings to sustain high dividend payments are less likely to carry-out a long-term strategy.
With this in mind, the equity income co-portfolio manager said investors should be aware of these warning signs.
A high pay-out ratio
Mr Ryan explained, “A high pay-out ratio is often an early sign a company is stretching itself to deliver regular income to investors – this is a measure of the proportion of earnings that gets paid out.”
Borrowing to finance dividends
This is another indicator that management is attempting to make its shares more attractive to investors with an eye on income, but it’s also a sign that the strategy may not be sustainable.
“Tracking companies closely and understanding their respective stories relating to the way they allocate capital to grow versus returning capital to shareholders is an important part of determining whether they have a narrative that supports a sustainable dividend,” Mr Ryan said.
Watch out for the yield trap
The media sector is a particular area for caution, he said, noting that content delivery changes are placing added pressure on business models.
“As a result, many of these companies have dropping earnings with legacy cost structures and high payout ratios. Investors in these types of companies should be careful not to fall into what we call a ‘yield trap’,” Mr Ryan said.
Concentration risks
While considering sustainable dividends, it’s also critical that investors avoid focusing solely on dividends at the expense of other factors, he said.
“For one thing, high demand for income in the share market has led multiple expansions where a company’s share price stretches well beyond where earnings might justify, making these companies risky and potentially more volatile for investors,” Mr Ryan said.
“Beyond considering valuations, franking credits are extremely valuable to retirees, so we are always on the lookout for companies with the potential to conduct off-market buy-backs in the near future.”
Property
Millennials believe first home buyers need more support
Australia’s up-and-comers in the housing market say more needs to be done to slow rising house prices. ...Read more
Property
3 in 4 borrowers in trouble are in lockdown: ANZ
Despite offering support, ANZ said freezing home loan repayments will be the last resort, as three in four requests for support stem from NSW. ...Read more
Property
RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attempts by APRA to cool the housing market. ...Read more
Property
Federal incentives are driving more first home buyers into the market
While property prices continue to grow, new research suggests that the government’s current crop of first home buyer incentives is having an impact on this segment of the market. ...Read more
Property
Why it now costs 130% more to service a mortgage than 3 decades ago
The lifetime cost of owning a home has increased by over 130 per cent in just three decades, new research has revealed. ...Read more
Property
Using the 30/30/3 rule for home buying during uncertain times
Thinking of buying a home? Uncertain economic times may have you double guessing your purchase, but the 30/30/3 rule can help you make this a reality. ...Read more
Property
Rental yields reach decade high, but not all markets move at the same pace
Changing consumer preferences towards lifestyle destinations and a lack of supply have led to record national price growth, albeit price fluctuations vary region-to-region, fresh figures show. ...Read more
Property
What younger Australians are getting wrong about home loans
As young Australians look to fight the odds and take their first step onto the property ladder, more and more are making easy mistakes. ...Read more
The Olympic effect on property and equity investors; COVID-19 Disaster Payments and super
Listen now
Do lockdowns boost property prices? Are short-sellers levelling the playing field? Did you lodge your tax returns early?
Listen now
Will lockdowns halt the housing boom? Is the metaverse taking over? And the cons of lodging your tax returns early
Listen now
Are you being priced out of the market? Have you got the Tuesday blues? And are you ready for the upcoming super changes?
Listen now
Property
Millennials believe first home buyers need more support
Australia’s up-and-comers in the housing market say more needs to be done to slow rising house prices. ...Read more
Property
3 in 4 borrowers in trouble are in lockdown: ANZ
Despite offering support, ANZ said freezing home loan repayments will be the last resort, as three in four requests for support stem from NSW. ...Read more
Property
RBA gives APRA’s use of macro tools a tick of approval
Ahead of an expected move to impose tougher lending rules on the banks, the Reserve Bank has looked into previous attempts by APRA to cool the housing market. ...Read more
Property
Federal incentives are driving more first home buyers into the market
While property prices continue to grow, new research suggests that the government’s current crop of first home buyer incentives is having an impact on this segment of the market. ...Read more
Property
Why it now costs 130% more to service a mortgage than 3 decades ago
The lifetime cost of owning a home has increased by over 130 per cent in just three decades, new research has revealed. ...Read more
Property
Using the 30/30/3 rule for home buying during uncertain times
Thinking of buying a home? Uncertain economic times may have you double guessing your purchase, but the 30/30/3 rule can help you make this a reality. ...Read more
Property
Rental yields reach decade high, but not all markets move at the same pace
Changing consumer preferences towards lifestyle destinations and a lack of supply have led to record national price growth, albeit price fluctuations vary region-to-region, fresh figures show. ...Read more
Property
What younger Australians are getting wrong about home loans
As young Australians look to fight the odds and take their first step onto the property ladder, more and more are making easy mistakes. ...Read more
More articles
Website Notifications
Get notifications in real-time for staying up to date with content that matters to you.
