When you see shares trading with above-average dividend yields it can be incredibly tempting to make an investment right there and then. After all, in this low interest environment it is getting harder for many investors to source a suitable level of income.
But unfortunately the companies with the biggest dividend yields are not always great investments and can in fact be wealth destroyers. Right now there are a couple on the ASX which I feel are perhaps best avoided. Here they are:
Monadelphous Group Limited (ASX: MND)
Analysts are forecasting the shares of the engineering company to provide an estimated fully franked 6% dividend in FY 2016 according to CommSec.
Whilst there may be a renewed sense of optimism around the company following the recent announcement of key contract wins worth $140 million from both Rio Tinto Limited (ASX: RIO) and BHP Billiton Limited (ASX: BHP), NAB Group Economics is predicting a drop of up to 70% in Australian mining investment over the next few years.
If this were to occur then it is very likely to put a real strain on companies like Monadelphous and their dividend payouts. Analysts expect the company's dividend to decrease by around 11% in both FY 2017 and FY 2018.
Asaleo Care Ltd (ASX: AHY)
After a massive 30% drop Asaleo Care's shares do look like a tempting option for income investors. Using current analysts' estimates its shares are expected to provide a 10.5 cents dividend in FY 2016. This would be an increase from 10 cents last year and an unfranked 7% dividend at the current price.
But I would be very surprised if the personal care and hygiene company is able to grow its dividend this year considering the challenges it faces from increased competition and higher pulp prices. These challenges meant that on Friday the company advised the market that it expects half year statutory net profit after tax of $24.9 million, which is a drop of 23.4% from HY 2015.
Considering its sizable debt and already high payout ratio, I feel it is likely that the company will be forced into cutting its dividend unfortunately. When pulp prices become favourable once again then Asaleo Care could be a good investment, but for now I would keep away from this one personally.
