Let’s start with the basics.
A dividend is a share of a company’s profits that are paid to shareholders.
Investing in companies that are paying consistent dividends has been a consistently profitable strategy over the past 5 years, but is it time to change tact?
With interest rates rising, and political uncertainty at record highs, we’ve highlighted below the top 5 reasons you should consider heading for the exit when it comes to dividend stocks:
1. Company is burning cash
It’s important to consider the company’s free cash flow when you’re looking at a company’s dividend policy. A company may in fact burn through their cash position to maintain their dividends during difficult years. Consider whether the company can maintain this or if a future dividend cut could be likely.
2. Are you looking for growth or income?
Companies that are paying out a larger portion of their net income as dividends are forgoing reinvesting in the growth of the business. It’s important to consider which strategy aligns with your own personal financial goals.
3. High and rising interest rates
When interest rates are low, high-dividend paying stocks can be an attractive investment option. As interest rates are rising and are relatively high compared to dividend yields, this can make high-yielding stocks less attractive. It’s important to consider where interest rates are and where they’re going to be relative to dividend yields.
4. Are dividends increasing?
It’s important to examine the company’s history of earnings and dividend growth. If the earnings and dividends are not increasing each year, consider if there’s a valid explanation for this.
5. Is the yield unsustainable?
A high dividend yield can be indicative of a low and falling share price. A falling share price can be indicative of a company’s fundamentals deteriorating, which may lead to a reduction in the company’s dividends. Many companies will often halt their dividend policy while they rebuild the financial position.
Remember, if something sounds too good to be true…it often is. Do your research and seek professional advice before making investment decisions.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Independent Fee-Based Financial Adviser with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to international and local professionals in Singapore.
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Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.