Dividend yield is a big reason many investors buy shares, but it shouldn't be. Too many times investors get caught up on the potential for a company to pay a big dividend, only to see its earnings (and subsequently the payout) fall dramatically.
Although these five companies offer great dividend yields, at a time when interest rates are near rock bottom, its important investors look deeper into the underlying businesses and their potential to continue growing earnings.
Westfield Retail Trust (ASX: WRT) is the Australian and New Zealand arm of Frank Lowy's huge global shopping-centre empire, Westfield Corporation (ASX:WDC). Yesterday was the company's record date for a 9.925 cent payment, representing a 3.2% yield at current prices. It is anticipated the company will payout (at least) a 9.5 cent final dividend, giving it a full-year dividend yield of 6.3%.
Due to the imminent 'death of bricks-and mortar-retail stores' unsurprisingly many high yielding companies are found in the retail space – a sector which shrugged off criticism and posted huge gains in 2013. Myer Holdings Ltd (ASX: MYR) has been in the spotlight recently for its failed attempt at a merger with rival David Jones Limited (ASX: DJS). Despite a "patchy" retail environment, Myer is expected to pay a full-year dividend of 17 cents, giving it a fully franked dividend yield of 6.7%.
Shares in Sigma Pharmaceuticals (ASX: SIP) – the owner of Amcal, Amcal Max and Guardian pharmacies – have trended sideways in recent years as PBS growth has remained non-existent and the group has faced increased competition. It maintains excellent balance sheets which has enabled it to buy back shares and pay a strong dividend – it has a forecast yield of 6.3%.
When interest rates are lowered and confidence begins to return to the equity markets, property and construction companies will generally take longer to realise gains than retail stores. Stockland Corporation Ltd (ASX: SGP) this week announced an underlying profit of $267 million for the half-year to 31 December 2013 and said: "The result was underpinned by a significant improvement in the performance of its residential business" – up 39% on the 1H13. It maintains low levels of gearing (24%), which will allow it to pay out a dividend yield of 6.2%.
BWP Trust (ASX: BWP) is a listed real estate investment trust (REIT) with a majority of its properties occupied by Wesfarmers Ltd's (ASX: WES) Bunnings Warehouses on long-term contracts. Stable earnings (thanks to a 99.3% occupancy rate), high dividends and a commitment of returning to shareholders has enabled this company to outperform the market in each of the past 1, 3, 5 and 10 years. I anticipate a full-year dividend of 14 cents or 6%.
Foolish takeaway
To be a successful investor, it's vital you focus on more than dividend yield. There are so many other functions which must be taken into account before a company's board pays a dividend. Although these five stocks pay big dividends, I would not be comfortable holding all of them in my portfolio as many face both internal and external challenges.