Are high dividend stocks a good investment ? - Seedly

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Asked by Anonymous

Asked on 05 Apr 2019

Are high dividend stocks a good investment ?

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated on 09 Apr 2019

On top of what the others have mentioned, I can introduce 2 metrics that might be helpful, which is Dividend Payout Ratio and dividends as a percentage of free cashflow.

Dividend Payout Ratio

Dividend payout ratio is simply the percentage of net profits that are being paid out to shareholders. To find this simply take dividends paid out divided by net profit as shown. The lower the figure, the better, since this means that the company isn't taking out too much of its net profits for dividend payments, and the dividends can sustain.

Dividends as Percentage of Free Cashflow

FCF measures cashflow that is availible to lenders and shareholders after the cash needs of the business have all been settled. This is a powerful measure since it looks at what kind of cash remains for non-business operating activities.

The formula shows how to get FCF. To get the percentage yield, just take the dividends divided by the FCF. Again, the lower the percentage the better.

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A high dividend yielding stock might look enticing but one has to dive in deeper to analyse the financials of the company. Is the dividend payout taking up a large percentage of their revenue / profits, are they generating positive cash flow. What are their strategies moving forward. Rickermers Maritime listed on SGX is one good example of a high dividend stock that went from Hero to Zero.

At a price of USD0.26, it paid out USD0.024 worth of dividends consistently for 4 years. Alas, their cash position simply couldn't sustain the payouts, orderbooks were blank and they had to resort to filing for bankruptcy, with the company eventually winding up. Thus it is important to do one's due diligence in purchasing high dividend yielding stocks.

If you can see the high dividend yield, other investors can too. But why aren't they jumping onto the bandwagon to push up the price? There comes your investigative skills to uncover this.

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Richard Woon Tian Jun
Richard Woon Tian Jun
Level 6. Master
Answered on 05 Apr 2019

Not necessarily. Just look at the Telco industry, they are getting beaten down on all fronts - stock price because of loss of investor confidence and profit margins because of increasing competition. Yet they still try to offer extremely attractive dividends eg. Starhub with a forward dividend yield of 10.53%. To put that in perspective, REITS, a form of trust that has to payout 90% of their income to unit holders, have a dividend yield of about 5~8%.

I think when it comes down to it, business survival is the most important. Sometimes, a dividend cut may be painful in the short term, but if it can ensure that the firm has money retained earnings for reinvestment and payment of debt, I think as an investor I would rather have 1~2% lesser dividends for a few years if it didn't mean that the entire stock price would drop 20% if it didn't cut dividends.

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Zann Chua
Zann Chua
Level 6. Master
Answered on 05 Apr 2019

Hello!

many people have the misconception that high dividend stocks is always good. However, this may not be the case. This is because a dividend is a percentage of a business's profit that it pays to their shareholders in the form of cash. When money is paid out as dividend is not being reinvested into the business. Thus, if a business is paying too high a percentage of its profits, it could be a sign that it has little room to grow by reinvesting its business and thus the company is unlikely to have any upside. ​

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William Hershaw
William Hershaw
Level 1. Freshie
Answered on 06 Apr 2019

Yes. As part of a well diversified portfolio.. But in retirement should be alongside a broader market etf in drawdown.

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Jonathan Chia Guangrong
Jonathan Chia Guangrong, Fund Manager at JCG Fund
Level 6. Master
Updated on 05 Apr 2019

High yielding dividend stocks may not be a good thing, as there may be higher risk involved. Case in point, look at Asian Pay Television Trust. The dividend yield was quite high before it got cut and the stock price suffered a lot as well. Consider looking at stocks with stable or even increasing dividends. The latter will be more common in the US

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