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Have you fallen into the ‘dividend trap’?

Trap

Telstra, the former “darling of mum and dad investors”, has lost some of its lustre, and the lesson is to not forsake fundamentals for tax advantages, a research house has said.

Lonsec Research has told shareholders to be “wary” of high yield shares with questionable fundamentals, pointing to the Telstra shareholder exodus after it cut its dividend from 15.5c to 11c per share.

“The lesson of Telstra is that investors should not invest purely for income or tax advantages (i.e. franking credits) at the expense of sound fundamentals,” the Lonsec analysts said.

“Despite being stuck in a downward trend since mid-2015, investors tolerated the stock’s poor performance so long as it maintained its attractive fully franked dividend.

“The problem is that by the time a company is forced to cut its dividend, fundamentals have already deteriorated. In other words, investors waiting for the dividend cut as a signal to bail were already too late.”

Noting that Telstra had been the “darling of mum and dad investors” since its final privatisation, Lonsec said Telstra’s fundamentals began to suffer under threats from the NBN and TPG, as well as falling fixed-line revenue and “a crippling bureaucracy”.

Speaking at a media briefing in Sydney this week, managing director of Plato Investment Management Dr Don Hamson said he predicts another dividend cut from Telstra.

“Telstra is probably going to cut its dividends another 20 per cent,” he said.

“It cut its dividend 30 per cent this year but I think it's still down another 20 per cent in a year or two's time because that's when the NBN payments will run out and they basically have no money to pay dividends.”

Dr Hamson said the market has “finally come around” to a realisation that there is another cut coming, and that’s why the share price has fallen 50 per cent in the last 18 months.

“One of the risks of high-yield investment is sorting the wheat from the chaff,” he said.

“I would argue that one of the tricks of investing for income is not to get sucked in to the highest yielding, or historically yielding, stocks because they often tend to be dividend traps.”

Have you fallen into the ‘dividend trap’?
Trap
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