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Is Genworth Mortgage Insurance Australia a dividend trap?

The Reserve Bank of Australia’s governor has suggested the next move in the official cash rate will be up, but this may not happen for a while and it may be a slow trajectory upwards.

Investors looking for yield should be wary of buying companies based on a high dividend yield. A high dividend can be due to:   

  • A falling share price 
  • Company going nowhere
  • A special one-off dividend 

Genworth Mortgage Insurance Australia (ASX: GMA) is one of the highest dividend payers with a trailing franked dividend yield of 15.29% per annum, but the share price has fallen 25% in a year on a weak outlook for earnings growth (1 year growth of -9% forecast by JB Were).

The PE ratio is 10.2, which is relatively low, but for the same reason the dividend yield is high. As reported by Fool.com.au on 11 April, UBS changed its rating from sell to neutral with a price targt of $2.30, which the share price beat at $2.31 at the time of writing.

But, although there may be limited downside, what is the upside?

Gemworth is paying out 50%-80% of underlying NPAT as dividends, so that doesn’t leave much room for investing.

There may not be a housing crisis yet to impact profits but the housing market is showing signs of softening and is likely to continue its downward trend. 

Other strong gross dividend payers, which are trading on low PE ratios are (see table) G8 Education Limited (ASX: GEM), Fortescue Metals Group Limited (ASX: FMG), Telstra Corporation Ltd (ASX: TLS) and Alumina Limited (ASX:AWC). See the table below for more info:

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Motley Fool contributor Rosemary Steinforth owns Telstra Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended G8 Education Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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