MENU

Beware of these dividend traps in 2014

A quick scan of the top dividend stocks on the ASX using the stock screener on my broker’s online platform reveals some interesting names. There are a surprising amount of stocks with a yield of over 10%, however investors must be careful when looking at this number in isolation.

The dividend yield is often calculated based on the full dividend payout from the previous 12 months and the current price, which can result in a distorted yield if the company’s prospects have fallen over the period. There are a few notable examples in the top dividend stocks;  one is Codan Limited (ASX: CDA), its share price has fallen 80% over the past 12 months, but because the 2013 final dividend of 7 cents was paid in September last year, the company has a yield of 12.5% based on payouts of 7 cents + 1.5 cents (paid in March). In reality, the payout for the next 12 months will likely be closer to 5 cents in total rather than 8.5 cents.

Beware

So investors should take care when in search of stocks that pay big dividends. Some of the bigger names that are expected to see big falls in dividend payout are:

  • Arrium Ltd (ASX: ARI) delivered a big 9 cent payout over the past year but some experts believe this could fall as low as 5 cents next year if the steel and iron ore industries continue to suffer from low prices.
  • Metcash Limited (ASX: MTS) has been a high profile casualty in 2014 following the announcement of a significant restructuring and investment initiative early in the year. The share price has suffered and the once-reliable big dividend stock is expected to slash the full year payout from 28 cents in 2013 to just 15 cents next year.
  • NRW Holdings Limited (ASX: NWH) has been caught in the mining construction slowdown. While the company’s mid-year results were better than expected, management decided to cut the dividend payout in order to focus on lowering debt. This is a prudent measure in such times but the payout is expected to fall from around 13 cents last year to 6 cents next year.

A company with a much better dividend yield is The Motley Fool's favourite income idea for 2014. Check it out in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of "The Motley Fool's Top Dividend Stock for 2014."

Motley Fool contributor Andrew Mudie owns shares in CDA. You can find Andrew on Twitter @andrewmudie

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.