To the uninformed, investing for yield is straightforward.
Simply look for the highest yield on the market today, and buy.
But there are dangers with this approach and the worst way to blow up your hard-earned cash is to find out after the event that the yield you were chasing was a mirage.
Three stocks at the moment are paying fully franked dividends and appear, at first glance, to be dishing out exceptionally attractive yields:
- Vita Group Limited (ASX: VTG) — 14.1%
- Adairs Ltd (ASX: ADH) — 8.2%, and
- Myer Holdings Ltd (ASX: MYR) — 8.00%
Remembering that these yields are trailing yields — the last twelve months of dividends as a percentage of today's share price — you'll need to ask yourself whether you think the dividend will rise, stay the same, or fall from the current level.
And if the price recently has fallen, you have to ask yourself why.
The higher the return, the higher the risk; and there's a real risk these dividends could fall from current levels given the performance of each company and the challenging industry environments they operate in.
The Vita Group share price have fallen in response to changes — read: reductions — to its remuneration arrangements between it and Telstra. Adairs' share price is down substantially since November last year when it provided the market with a poor trading update, and Myer is down from its 12 month high of $1.46 — and down from its float price in 2009 of $4.10 — to trade now at around 74 cents, also due to a [continued] challenging retail trading environment.
Given there's no guarantee of a return to higher profitability for each of these businesses, it might be best to assume that the current dividends will fall from this point which could of course expose you to capital losses, even from these low share prices.
The best way forward is to look for companies that pay dividends that are both sustainable and rising.
In that light, you have better options.
Just click on the link below to gain access to our free report which lists what we think are our top 5 dividend paying stocks for 2018.
