During this company reporting period there has been a lot written about shareholders buying companies in the “chase for yield” . The discussion is that interest rates are low and investors some of them first time investors are buying shares in companies to increase their income for retirement.
The thing that I have noticed in looking at some of the company results is that some companies have increased their profits and the dividend has risen accordingly. Other companies have reduced profits however they have maintained or increased their dividend to keep investors on side.
Ask yourself this question,
Do you think the dividends from a company are more sustainable in the future from a company that is increasing its profits or from a company that is struggling this year and are maintaining the dividends to keep the market on side ?
One industrial company this week increased profits by close to 20% and increased the dividend by the same amount which is a nice pay increase for the shareholders.
Then there was another mining company that recently had a “statutory loss” of more than $100m however increased their dividend and the share price had a sharp increase.
There is a lot more questions to be asked before you purchase shares in a company and we normally use a combination of managed funds and direct shares to ensure good diversification for your portfolio’s capital protection.
The interesting fact about the industrial company that increased the dividend is that it is now trading on 1.5% dividend yield however it will not be purchased by shareholders chasing yield. However a client I was meeting with this week purchased that company a few years ago when it was on a 2% dividend yield. Their dividend yield is now over 5% on their purchase price which was $17.60 and the share price is now well over $60 per share so not only have they had a good increase in dividend yield they have also had an increasing share price as well.
An increase in share price is only sustainable in the long term by an increase in profit. Anything else is market hot air or short term talk by the company to retain shareholder support until things improve.
We still have clients, one of them only just turned 50 and others now in their 70’s and 80’s who bought 2,500 CBA shares on the float at approx $5.30 each. Their dividend yield is now over 60% as the CBA now pay over $3 pa in dividends and they still hold the shares.
They could have sold the shares at $10 when they would have made approx 100% profit however the good thing is they didn’t get scared out by good performance and they have made an extra $80 per share and do not have a days worry about their investment.
Simple message, Don’t buy shares based on their Dividend Yield alone. A company needs to have sustainable profits which means there needs to be a good prospect of increasing profits. That is the way that you will preserve your capital value and then spend the dividends.
You need to determine what cashflow you require from your investments and then your share portfolio needs to perhaps have some “chase for Yield” type stocks however more importantly it needs to have companies with sustainable and growing profits as that is what will give you the growing income yield as described in a couple of real life examples above.
When interest rates rise in the future which they will at some point the “Chase for Yield” stocks will be less attractive based on something that has nothing to do with the company and that is where the share price will fall and you will lose capital value which is not what you want if you can avoid it.
Share prices rise and fall all the time however you want some substance supporting your companies share price and that substance can only be growing profitability and not that the historic dividend yield is high compared to the cash rate in the bank which can change at any time.
It is critical to have a clear vision of exactly what you are looking for and why and that way you have a strong probability of getting what it is that you are after.