abstract

A
10%
dividend
yield
looks
attractive–
it’s
also
a
red
flag.
Especially
in
times
of
recession
or
when
there
is
a
threat
of
the
economy
cooling
down,
as
is
the
case
now
due
to
rising
interest
rates.

The
basis
for
a
high
dividend
yield
is
either
a
high
dividend
or
a
low
share
price.
The
latter
comes
into
play
when
the
economy
slows
down
and
companies’
turnovers
and
profits
start
to
show
a
downward
trend.
When
the
share
price
falls,
the
dividend
yield
rises,
but
for
the
wrong
reason.

There
are
plenty
of
examples
of
companies
that
offered
a
high
dividend
yield
on
paper,
but
eventually
announced
that
they
would
cut
the
dividend
or
even
scrap
it
altogether,
temporarily
or
permanently.
The
telecom
sector
has
suffered
from
this
in
the
past.
More
recently,
the
banks
and
even
the
oil
giants
have
not
been
spared;
Shell
was
forced
to
cut
its
dividend
in
2020,
a
shock
to
the
world
of
dividend
investing
at
the
time,
as
Shell
has
always
been
seen
as
the
cornerstone
of
a
dividend
portfolio.

Some
dividend
funds
use
3%
to
3.5%
as
a
lower
limit
to
include
shares
in
their
dividend
strategies.
What
about
an
upper
limit? Morningstar
analysts
use
a
rule
of
thumb
that
a
dividend
yield
of
5%
to
6%
is
a
healthy
high
end.
Above
that,
the
risk
regarding
shelf
life
increases
sharply.

Lack
of
opportunity

There
is
another
argument
against
a
very
high
dividend.
For
this
we
look
at
the
pay-out
ratio,
the
part
of
the
earnings
per
share
that
is
paid
out
to
shareholders.
Even
when
there’s
nothing
wrong
with
the
company
or
its
sector,
a
high
payout
ratio
isn’t
necessarily
good
news
for
investors.
Companies
may
do
this
because
they
have
insufficient
opportunities
to
invest
their
earnings.
In
order
to
still
create
value
for
shareholders,
they
pay
out
the
excess
cash.
This
slows
down
a
company’s
future
growth,
as
there
is
less
dry
powder
for
investment
when
growth
opportunities
appear. 

What’s
worse,
a
company
may
insist
on
maintaining
its
dividend
even
when
cash
flows
are
insufficient
to
cover
the
payment.
Companies
then
fund
the
payout
with
external
financing,
burdening
their
balance
sheets
and
lines
of
credit. 

Dividend
growth

For
long-term
dividend
investing,
it
is
not
only
the
current
dividend
policy
of
a
company
that
is
important,
but
also
the
question
of
whether
there
is
a
prospect
of
dividend
growth
in
the
coming
years,
growing
in
line
with
rising
corporate
profits.
There
is
a
select
group
of
companies,
mainly
located
in
the
United
States
and
part
of
the
S&P
500
Index,
that
manage
to
increase
their
dividends
year
after
year
regardless
of
the
state
of
the
economy
and
the
sentiment
in
the
financial
markets:
the
so-called
Dividend
Aristocrats.

These
are
typically
companies
in
defensive
sectors
such
as
utilities,
consumer
defensives
and
telecoms.
Consider,
for
example,
Coca-Cola
[KO],
Procter
&
Gamble
[PG]
and
PPG
Industries
[PPG].
They
are
the
least
sensitive
to
the
cyclical
movements
of
the
economy
and
have
strong
market
positions
and
solid
balance
sheets
that
guarantee
dividend
payments
and
offer
room
for
increase
with
rising
profits.

It
is
up
to
the
dividend
investor
and
their
risk
appetite
whether
they
prize
high
payouts
over
security.
In
any
case,
more
isn’t
always
better. 

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