A lot of shares with big yields can actually be yield traps. This means that although the last 12 months of a business’ dividends may look good, there’s a high chance it may cut it in the future.
Anything with a yield of above 9% is really at risk in my opinion, so it’s worth considering if the following shares are actually opportunities:
Mortgage Choice Limited (ASX: MOC)
Mortgage choice is one of the country’s largest mortgage broking groups. It’s currently trading with a grossed-up dividend yield of 13.5%.
It has actually performed really well since the GFC, steadily growing earnings with the booming housing market. The dividend has been maintained or grown every year since the GFC.
Investors have become particularly bearish on the stock due to the Royal Commission’s findings. A dry-up of credit growth could lead to problems for Mortgage Choice. The market doesn’t seem to think Mortgage Choice can maintain its dividend.
Telstra Corporation Ltd (ASX: TLS)
Telstra seems to be the big talking point for the market in recent weeks. With a 22 cents per share annual dividend it’s currently trading with a grossed-up dividend yield of 11.2%.
The promise of income from Telstra has been a classic honey trap, over the past couple of years. Investors thought 30 cents per share was the dividend forever, now it’s 22 cents, it could go down further.
I wouldn’t buy Telstra for the income, but investors might be able to justify buying Telstra shares at the current value.
WPP Aunz Ltd (ASX: WPP)
WPP Aunz is the local subsidiary of UK-based advertising giant, WPP. It’s currently trading with a grossed-up dividend yield of 9%.
The advertising industry is going through a bit of a seismic shift at the moment with online advertising changing everything, particularly because algorithms are deciding who sees what advertisement.
The company is still creating low growth. So if I were looking to purely create the biggest dividend income possible over the next year or two, this company could be one of the front runners.
Of the three shares, I think WPP has the best chance of growing, or at least maintaining, the dividend and earnings per share (EPS) over the next 12 months. However, if I were buying a share for income I’d much rather go for WAM Research Limited (ASX: WAX).
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Motley Fool contributor Tristan Harrison owns shares of WAM Research Limited. The Motley Fool Australia owns shares of and has recommended Telstra 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.