With the advent of online brokerage websites in the past few years, it's easier than ever for investors to generate lists of stocks to investigate further. Income-seeking investors can simply punch in their requirements and see a list of all Australian companies with high dividend yields.
Unfortunately, technology is not yet at a place where it can identify which of these apparent high dividends are real, and which could prove illusory. Here are 3 high-yielding companies whose dividends are built on shaky foundations:
Oneall International Ltd (ASX: 1AL)
Chinese furniture maker Oneall paid a whopping dividend in 2016 that was much larger than what the company actually made from operating cash flows. The balance of payments was made up by an issue of new shares in the company. This was due to the unique timing of dividend payments, which resulted in three dividends in a single year – a lucky occurrence that is unlikely to be replicated in the future.
Estia Health Ltd (ASX: EHE)
Estia Health actually doesn't pay a dividend at present, with the company temporarily suspending payments while it tries to reorganise its balance sheet. Even so, occupancy has been slipping at Estia's centres, debt remains a concern, and the group has come under the regulatory spotlight due to some of its pricing practices (resulting in higher-than-expected claims from the government funding body). Management has announced its intention to resume paying "at least 70% of Net Profit After Tax" as dividends, although given this company's current issues it is not a dividend I would trust my retirement to.
CSG Limited (ASX: CSV)
CSG has paid dividends of 9 cents per share in both 2015 and 2016, resulting in a significant windfall to shareholders – which equates to a yield of around 12%. However, in both years the company has seen heavy cash outflows and has paid a large dividend on top of that. Although this is due to the company borrowing for its lease liabilities (a source of earnings growth), these dividends are effectively being funded through debt, and dividends in both of the previous years have been larger than company profits. CSG is growing well, but I'm uncomfortable with management's determination to pay such high dividends at the same time as trying to grow the business.
Comparably-sized leasing business Thorn Group Ltd (ASX: TGA) pays about 3/4's of the dividend CSG does (in dollar terms) and I wonder if CSG management was improperly motivated by their previous incentive package, which focused heavily on Total Shareholder Return (TSR) – a measure of share price movements and dividends paid.
Foolish takeaway
This is not to say that any of the above companies are a bad prospect per se. It is a reflection that income-seeking investors must take extra care to investigate a seemingly-attractive dividend in greater depth. In the simplest case, brokerage websites aren't updated to reflect a cancelled or suspended dividend, which leads investors into buying a lemon. More commonly, a company's dividend will be vulnerable to external forces like high debt or weaker business performance, resulting in a cut – hardly ideal, if you're buying shares to supplement your income.
