With technology nowadays, it's easier than ever to search for companies that fit the criteria you want. Why settle for the 4.5% dividend of Wesfarmers Ltd (ASX: WES) when your online broker can generate a list of companies paying 6%, 7%, or even 10% dividends?
There are a few risks to this strategy however, namely that said dividends can often prove dangerously deceptive. Here's my take on these 3 companies' big dividends today:
Fortescue Metals Group Limited (ASX: FMG)
With iron ore prices at current levels, Fortescue is generating a lot of cash, rapidly paying down its debt, and distributing an attractive yield to shareholders. However, it is a miner and remains vulnerable to changes in iron ore prices. Additionally, Fortescue will likely have to increase its expenditure on exploration in the future, potentially reducing the amount of cash available for dividends. Its payout ratio (dividends as a % of profit) was just 38% at the most recent half year, however, suggesting that the current dividend is sustainable even if ore prices decline somewhat.
Telstra Corporation Ltd (ASX: TLS)
Telstra Corporation's big dividends could be coming to an end, with the company paying out more in dividends than it made in profits in the half year. This is not as unusual as it might sound, as Telstra aims to 'average out' its dividends over the full year to take into account the timing on payments and so on. However, with a 14% decline in earnings per share at the most recent half, many investors are wondering if the telco's 7% fully franked dividend is sustainable.
Importantly, even if the dividend is cut somewhat, Telstra retains a very strong brand and dominates the mobile market. It is seen as having highly reliable earnings, which allow it to borrow debt at a very low price. So while Telstra's dividend might get cut somewhat, shares should still offer an attractive, sustainable yield.
Crown Resorts Ltd (ASX: CWN)
Crown's high yield, as shown by some brokers, is an illusion due to the payment of a special dividend of 83 cents in the recent half. As normalised profit actually shrank, Crown's future dividends are likely to be much closer to the ~72.5 cents ordinary dividends paid in the last 12 months. That would be a still-attractive dividend yield of 5.9% or less, but it may fall somewhat bearing in mind that profits were lower in the first half.
