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May 15, 2021

Check company's history of dividend payments carefully: report

Every Wednesday, Patrick McKeough, editor of The Successful Investor publishes his “Investor Toolkit” series on his TSI Network. These weekly updates are designed to offer specific investment advice ... which you can accept or ignore as you like.

Written in jargon-free English, each update provides a fundamental piece of investing strategy, and shows you how you can put it into practice right away.

Last week, for instance, McKeough warned about some of the dangers in putting too much faith in a company's history of dividend payments. Too many investors think of a stock with a good dividend history as the next best thing to a government bond.

And that's a mistake, he warns: "Even the best dividend stocks can go through dividend droughts — periods when they have to cut or quit paying dividends due to setbacks within their company, their industry or the economy as a whole."

Investors generally look to more conservative stocks, like banks and utilities, for income, and to more aggressive stocks for capital gains. But, in doing so, they may be paying too much attention to yield. 

Yield, and especially a high dividend yield, can give investors a false sense of security since they have a natural tendency to think that all investment income is almost as safe and predictable as bank interest.

In fact, a high yield can sometimes be a danger sign rather than a bargain, he says. For example, a stock’s yield could be high simply because its share price has dropped sharply (since you use a company’s share price to calculate yield), actually signalling bad news.

Have you ever bought stocks whose yield turned out to be a misleading indicator. What was the end result?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...