Rational Investing

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19 April 2018

Some Might Make a Mistake


Years ago, when the S& P stock guide was a 'had-to-have' research source, there were those who would peruse the pages looking for high dividends yields.

Often, they spent little, if any, time considering why the yields were high. Forgetting earnings and payout ratios and dividend growth rates, they bought the yield. That frequently led to portfolios loaded with two things; lower quality issues and probable disappointment.

The chart below could well be the equivalent of the stock guide, showing where the higher yields are by sector, but with no financial analysis.

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It is not the high yield today that indicates an issue to buy but the rate of growth of the dividend-something that a simple bar chart can't show. A knowledgeable investor would look at the chart and ask why yields are so high for basic materials, financials, and utilities. While those sectors may be dealing with a multitude of concerns, one likely common thread relative to the dividend is a high payout ratio of dividends from earnings, leaving little room for increasing the dividend meaningfully.

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Next column: The Red Flag of High Yields