So just buying the shares with the highest dividend, without researching how safe that dividend is, can be a mistake.
There are now a huge range of high yielding blue chips but it is best to look for a dividend that is less likely to be cut even if that company's profits fall.
Once again, for those who invest for yield or income - either Dividend Yield Investing or Dividend Growth Investing - STOCK SELECTION is still the key.
Some investors look at historic yields; some at forecast (or "prospective") yields.
But either way, those yields can be unexploded mines, lurking for the unwary. Looking at yield on its own, in short, can quickly introduce you -- painfully -- to the meaning of the term "yield trap".
You buy a share, attracted by the high yield. But the dividend is then cut, or cancelled -- leaving you without the anticipated income. Worse, unsupported by the payout, the share price usually falls as well, leaving you also nursing a capital loss.
Let's see it in action.
Company A pays out 9 pence a share, with shares changing hands for 100 pence per share. So the dividend yield -- which is the dividend per share, divided by the share price, and multiplied by a hundred to turn it into a percentage -- is 9%.
But that 9 pence is unsustainable. Company A then halves its dividend, slashing investors' income. What happens to the yield? If the share drops to -- say -- 80 pence, the historic yield the becomes 5.6%. The "yield on cost" figure, of course, is 4.5%.
How, then, should investors spot potential yield traps? The most obvious reason for slashing the dividend is that the business simply hasn't got the money to pay it. The business's earnings, in short, aren't large enough to support a distribution to shareholders at historic levels.
Put another way, actual earnings per share aren't sufficiently large when compared to the anticipated dividend per share.
Which is where the notion of 'dividend cover' comes in: earnings per share divided by dividend per share.
Now, dividend cover shouldn't be followed blindly.
Some businesses -- such as utilities, for instance -- can quite happily operate with lower levels of dividend cover than more cyclical businesses.
Other businesses -- such as REITs -- must pay out a fixed proportion of earnings as dividends, so again a low level of dividend cover is the norm.
Still other businesses have very high levels of dividend cover, because they are growing -- and therefore retaining earnings for future investment -- rather than paying them out as dividends.
But as a broad brush generalisation,
- A ratio of close to one is definitely the danger zone. - A ratio much bigger than two indicates a certain parsimony. - A ratio of 1.5-2.5 is usually what I'm looking for.
worth to take a look at Zhulian now as the fundamentals have improved and the company is growing to other indo china countries. Can also watch out for Uchitec
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arowana
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Posted by arowana > 2017-01-17 17:14 | Report Abuse
Is there any master in stock market???? You must be insane!
The master of today might be turn into loser of tomorrow!
LOL