With all the calamity in the world — a war in Europe, rising interest rates, skyrocketing oil prices — dividend ASX shares have really come back into vogue.
Growth shares that rely on future earnings have been heavily dumped in favour of more stable and profitable companies that return earnings to shareholders via dividends or buybacks.
Combine that with the S&P/ASX 200 Index (ASX: XJO) dropping almost 4% for the year, and there are many stocks out there now paying stunningly high yields.
However, an income fund manager has warned investors to not fall prey to dividend "traps".
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When a 15% return is not as good as it sounds
Plato Investment Management senior portfolio manager Dr Peter Gardner took Magellan Financial Group Ltd (ASX: MFG) as a prime example in the current market.
The dividend yield for the fund manager now sits at an outrageous 15.34%, according to Google Finance, after its share price halved since 17 December.
"We think their ability to earn fee revenue and performance fee revenue, given their performance hasn't been great over the last year… their dividend going forward is likely to be cut in the next result," he told a client webinar.
"That's a dividend trap that we think investors should be wary of."
Magellan shares closed Wednesday at $14.40.
Dividends cut already, but more potentially coming
Two other traps Gardner pointed out were AGL Energy Limited (ASX: AGL) and Lendlease Group (ASX: LLC).
At the end of last year, AGL had a yield of 10.6% and LendLease gave out 2.7%.
But such high starting points meant brutal cuts came along during reporting season, according to Gardner, and it might not be the end of it.
"We had forecast AGL especially as a strong dividend cut candidate," he said.
"When they announced a significant cut in their dividends, the actual dividend received was 2.6%."
Similarly, LendLease is now down to 0.5%.
And to rub salt into the wound, both ASX shares provide zero franking credits.
"We think those continue to remain dividend traps."
AGL shares finished Wednesday at $7.21, while LendLease finished the session at $10.62.
