Monday, 21 November 2016

The Dangers of Super-High Yield Investing

https://sc01.alicdn.com/kf/HT1Kl1JFPtXXXagOFbXJ/206104539/HT1Kl1JFPtXXXagOFbXJ.jpg
That's what I call good yield
Source

Apparently the DIY Income Investor approach is an example of Super-High Yield Investing, which John Kingham ('The Dividend Hunter') defines in a recent article as "buying shares where the dividend yield is close to or above twice the market yield."

But is this really the 'dark side' of income investing?

Kingham describes the approach quite well, I think:

'Picture this: You decide to invest in a somewhat mediocre company which has a 6% yield. Most investors think the dividend is about to be cut, but what if they're wrong (a not unlikely scenario)? What if, instead of cutting the dividend, the company maintains it and copes admirably with whatever significant problems it is facing? In that situation it's easy to imagine the share price heading upwards as investors become less fearful and more optimistic about the company's future. 

If a dividend cut was no longer on the cards then other investors might accept a more reasonable yield of perhaps 4.5% from this mediocre company. For the yield to fall that much the share price would have to increase by 33%, and if that happened over the course of a year then your one-year return would be 6% from dividends, 0% from dividend growth and 33% from capital gains.'
 
The article then goes on to discuss three currently 'super-high yielding' shares:
  • N Brown Group (LON:BWNG)
  • Carillion (LON:CLLN)
  • Connect Group (LON:CNCT)

Of these I currently hold Carillion. I must admit that Kinghams's analysis of the problems facing the company seems quite convincing - a combination of high debt and out-of-control pension obligations.

I invested in Carillion again recently, on the basis that I had held it before, knew the kind of business it was involved in (rail infrastructure and other
support services) and I was hoping for an upswing in infrastructure investment. However, I don't think I have done my homework sufficiently here, and I will be hoping for a short-term price spike in order to sell.

Kingham's website is here.


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

3 comments:

  1. There's a good article on the (un)sustainability of Carillion's dividend here:
    https://www.sharescope.co.uk/philoakley_article89.jsp

    ReplyDelete
  2. Hi, thanks for the mention.

    Hopefully Carillion will maintain its dividend long enough to generate that share price bounce you're looking for. As you say, if we get some good news on infrastructure investment it might just happen sooner rather than later.

    - John K

    ReplyDelete
  3. Thank you for posting this article. I think it is very interesting however I would say that you need to evaluate a dividend not only against the market but you at least also have to take into account the payout ratio. A 5% yield with a 80% payout ratio is less sustainable than a 5% yield with a 30% payout ratio. That's at least how I see it.
    Have a nice evening.

    ReplyDelete