There are many companies with attractive dividend yields

For many shareholders, dividends are a real alternative to price gains. Looking at dividends yielding from 2% – 5% – keeping the historic low-interest phase in mind – it seems reasonable to have a closer look at companies` shareholder policies. How should you go on?

The easy way is to look online for shares with the highest dividend yields. Investors, who don´t want to invest in Google search results, can do their own research on different online platforms and filter the results with specific criteria. In doing so, over time you´ll come across shares with high – and apparently sustainable – dividend yields of 6%, 7% or even 8%.

Recalling the yield distribution of the automotive or oil industry of the recent years suggests that high dividends can be more the ordinary, not the exemption. Before submitting orders for those companies, investors should always ask themselfes the following questions:  “What´s the reason for the high payout? How sustainable is a continuous payout on that level?”

„Analysis of fundamentals and growth perspectives of a company are indispensible for dividend investors“

Companies usually start paying out their shareholders when the company is established in its marketplace and moves from the growth- to the maturity-phase. Changing consumer behavior (e.g. trend towards healthy nutrition) can speed up the process. An informed and attentive investor recognizes these trends and thus expects higher dividends as a substitute for growth. Looking at companies´ dividend history is the toolset of dividend investors to analyze the company´s ability to pay dividend yields of 6% or higher.

Looking at the companies` numbers and statements is a must as the management must also fulfill their obligations to other involved parties: Interest payments, necessary investments or share buybacks can impact the ability to pay dividends. Therefore, it´s important to deep dive into the balance sheet, profit-and loss, and cash-flow-statement.

„Externalities – political and economic events – have an impact on the company’s ability to pay sustainable dividends“
Investors with focus on high dividends who invested in automotive ten years ago got validated with high dividend payments cumulated over the years which made up for the disappointing share prices in the last years. Since the “diesel-gate” the sector is facing high R&D-costs for electric vehicles eating up the margins available for dividends. Investors entering the sector up to five years ago got disappointed. Early analysis on companies future prospective could have shed light on the real circumstances. Also, in the oil- & gas industry high dividends used to be the norm. The last drop in oil-prices impacted dividend-policies heavily, even at companies with a very dividend-friendly tradition. Thus, dividend investors must always keep the “margin of safety” in mind to avoid bad surprises.
„Dividend investors must always look at the company´s ability to pay future dividends in a realistic and critical way“
In addition to analyzing the companies` financial results dividend investors must be sufficient in evaluating sustainability of business models – which is one of the most important but also challenging tasks of investing. Especially in times of corona, there are many uncertainties ahead in terms of future long-term relevance of sectors. This makes it more difficult for the dividend investor to form an opinion on a companies` prospects. This makes it even more important to always review critically if a high dividend yield can be sustained in the future and thus make the stock a solid and sound yielding investment.

Markus Polz, CM-Equity AG