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Buying dividend stocks: downsides

In Financial competency on 03/05/2014 at 9:19 am

From FT

However, fund managers warn against simply picking stocks with the highest dividends.

“High dividend yields are a factor when picking stocks,” says Romain Boscher, head of equities at Amundi. But there are other important reasons for choosing a company, such as cash flows, to check the sustainability of a high dividend.”

Dividend cover, which calculates the ratio of earnings to dividends, has been improving as although companies have been increasing dividend payouts, earnings have been growing faster.

Even so, Mr Stout points out that some pension funds are reluctant buyers of equity. “It is a Hobson’s choice. Equities offering relatively high dividend yields are not necessarily investable for funds governed by perceived low-risk criteria. They do not have a proper choice as buying gilts offers a negative real return.”

Will Low, head of equity at Scottish Widows Investment Partnership, warns that shares are still considered risk assets and may not provide the answer in a worst-case scenario of a reversing, deflationary world economy.

He says: “We do not expect deflation, but it is a possibility. In such a scenario, the safest assets are government bonds. Equity income funds and companies offering high dividends are a better bet in equities, but they are not a guaranteed bet, particularly given this is now a more widespread consensus view.”

If Mr Rockefeller was alive today, he would no doubt, like some asset managers, draw hope from rising equity dividends. However, he would also likely be one of the first to admit that they are not necessarily the panacea in an uncertain world.

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  1. Div yields are high for a reason.

    Good companies usually don’t have high div yields.

    More important to see div growth (how many decades? min. 10yrs) plus economic moat, capital efficiency, economic goodwill that drives consistent cashflows.

    Best companies are those that have consistently raised their dividends every year for 30+ years, and even increased dividends during Oct2008-Jun2009.

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