Question about dividends

[Paul24]

Hi guys,

I'm just getting my feet wet around here and have a question about dividends.

Through the commsec site I searched all companies that had a dividend paying higher then 8%

Now one company had a yield of 122% (JRL) Would this be because it has experienced some enormous growth? What would the next pay out be like, fairly small?

Next question is about Telstra Corporation Limited (TLS) had a yield of 10.61% expecting this to be a more stable company, would this mean I would expect it to pay this dividend next year as well?

Or could it pay very good one pay out and fairly poor the next?

What I'm trying to get at is, how are you suppose to buy some shares for yield, say the banks interest rates are 5% for cash accounts, would it be unreasonable to try and find a company with shares that pay say 7% yield, how would you find a company that pays this.

 

[skcots]

Now one company had a yield of 122% (JRL) Would this be because it has experienced some enormous growth? What would the next pay out be like, fairly small?

Could be a number of things

e.g. an enormous collapse in share price
In 2002 hypothetical share AAA costs $10 per share and pays $0.50 per year (5%). The company then does something to make the investors run. the 0.50c dividend is still offered as promised but the share price has fallen to $1.50 making the yield at 33%

At 122% as you stated above you have to wonder is the dividend and the share price stable or likely to increase. I would say there is a lot of risk there otherwise anyone with half a brain would snap the share up sending the price up and the div yield down.

Next question is about Telstra Corporation Limited (TLS) had a yield of 10.61% expecting this to be a more stable company, would this mean I would expect it to pay this dividend next year as well?

10.61% is attractive but again is it sustainable and if it is will you loose the share price.
One year ago TLS cost $3.24. It paid $0.28 franked and is now worth $2.64. Thats a loss. Will next year be different thats for you to work out.

 

[Sean K]

The JRL figure looks like an anomoly.

The yield you read is probably just the cash return each year. There's other factors for a grossed up yield, or something.

Normally these yields presented are on the last FYs dividend as far as I know.

So, a company could reduce their payout in the following year, reducing the yield.

http://en.wikipedia.org/wiki/Dividend_yield

 

[Boggo]

Now one company had a yield of 122% (JRL) Would this be because it has experienced some enormous growth?

Possibly just the opposite, look at the price chart.
Dividend yield is a very simple concept but is not understood, look up the formula to see how dividend yield is calculated.
No one factor associated with stocks etc can be considered on its own.

Next question is about Telstra Corporation Limited (TLS) had a yield of 10.61% expecting this to be a more stable company

As above, see the chart, its a dog at the moment for 'investors'.

What I'm trying to get at is, how are you suppose to buy some shares for yield

Be careful just buying for yield, that's the illusion that keeps the Telstra holders happy as the stock free falls.

Understand the formula for yield and then look at the chart of stocks with high yield before you proceed.
When you get the formula sorted out, tell me if you would prefer to be holding Telstra at $8.00 with around 3 or 4% yield or at $2.70 with 10% yield.

There is a scanner for yield etc here but bear in mind that none of the selectable items are of any value if you do not understand how they are calculated http://www.australian-economy.com/
Have a look at the charts of the majority of stocks with a yield over say 6%.

Anyway, that's my , hope it is of some help.

 

[ParleVouFrancois]

JRL had a special capital return of 55 cents by the look of it, this is what is causing the 122% return rate, I highly doubt that any money will be returned this year.

 

[Paul24]

"Understand the formula for yield and then look at the chart of stocks with high yield before you proceed.
When you get the formula sorted out, tell me if you would prefer to be holding Telstra at $8.00 with around 3 or 4% yield or at $2.70 with 10% yield."

4% of $8 is 32 cents where as 10% of $2.7 is 27 cents.

But if you had $100 to invest, the 10% yield gives you $10 where as the 4% yield will ony give you $4

 

[So_Cynical]

What I'm trying to get at is, how are you suppose to buy some shares for yield, say the banks interest rates are 5% for cash accounts, would it be unreasonable to try and find a company with shares that pay say 7% yield, how would you find a company that pays this.

There's no getting around the fact that you have to read annual reports and other relevant company announcements to know what sort of dividends are coming up...im talking about stocks that actually have a dividend policy and are game enough, or have predictable enough incomes to forecast a dividend in advance.

Lots of stocks paying a gross yield of 7% and over...not hard to find if you actively follow stocks and build high yielding watchlists...TSI is a stock i hold that's projected to yield over 10% at current prices.

This AFR site has a high yielding list that's a good research starting point...on the weekly CSV yield leaders file TSI is ranked at number 11 with Willmott Forests one spot above it...Willmott went into receivership about a month ago. must choose your high yielders very carefully.

http://www.afrsmartinvestor.com.au/tables.aspx

 

[Boggo]

"Understand the formula for yield and then look at the chart of stocks with high yield before you proceed.
When you get the formula sorted out, tell me if you would prefer to be holding Telstra at $8.00 with around 3 or 4% yield or at $2.70 with 10% yield."

4% of $8 is 32 cents where as 10% of $2.7 is 27 cents.

But if you had $100 to invest, the 10% yield gives you $10 where as the 4% yield will ony give you $4

You're missing my point, another way of putting it, assume you bought Telstra at $5, would you rather have a 4% yield with the stock at $8 or a 10% yield with the stock at $2.70 ?

For the same annual dollar value dividend, the yield increases as the stock price falls = you lose $ but the yield sounds good.

 

[Julia]

Be careful just buying for yield, that's the illusion that keeps the Telstra holders happy as the stock free falls.

Exactly. They think to themselves, whacko, now I'm getting 10% yield instead of 5%, so it's really easy to ignore the fact that my capital is going down the gurgler.

"Understand the formula for yield and then look at the chart of stocks with high yield before you proceed.
When you get the formula sorted out, tell me if you would prefer to be holding Telstra at $8.00 with around 3 or 4% yield or at $2.70 with 10% yield."

4% of $8 is 32 cents where as 10% of $2.7 is 27 cents.

But if you had $100 to invest, the 10% yield gives you $10 where as the 4% yield will ony give you $4

You are ignoring what is happening to your capital for the yield on the stock to be increasing. Think about it.
Do a calculation of buying X number of shares to the value of, say, $10,000.
If this were to at the time offer a yield of, say, 5%, and then later the SP drops to half, then whacko, you have the delicious yield of 10%.

But let's remember that for this to happen your capital is now only worth $5000.

So in both cases your yield is going to be $500 p.a., but in the case of the diminished capital and therefore increased yield, your same number of shares are now only worth half as much.

This is a very fundamental point a lot of yield chasers fail to appreciate.

 

[Boggo]

Thanks Julia.

That's a better way of explaining it.

Cheers.

 

[BrightGreenGlow]

If it's any help Thodey said TLS would maintain 'comfortably' a 28c dividend through the 2010/2011 financial year... if this is true.. They should pay 42c until the end of the next fiscal year... I guess you'd be even money if the price dropped to $2.20 odd cents. I couldn't imagine that but who knows hey?? Atlest if you make a quick profit on another stock you could offlay a TLS loss against it to minimise tax but then again with the NBN coming hopefully the SP jumps... that day may be my exiting from my dearly loved TLS holding. hahaha

 

[buysellmestuffed]

Exactly. They think to themselves, whacko, now I'm getting 10% yield instead of 5%, so it's really easy to ignore the fact that my capital is going down the gurgler.


You are ignoring what is happening to your capital for the yield on the stock to be increasing. Think about it.
Do a calculation of buying X number of shares to the value of, say, $10,000.
If this were to at the time offer a yield of, say, 5%, and then later the SP drops to half, then whacko, you have the delicious yield of 10%.

But let's remember that for this to happen your capital is now only worth $5000.

So in both cases your yield is going to be $500 p.a., but in the case of the diminished capital and therefore increased yield, your same number of shares are now only worth half as much.

This is a very fundamental point a lot of yield chasers fail to appreciate.

So do i have to buy a stock yielding 5% have its share price fall 50% to make it yield 10 % , wouldn't it be better to buy the stock already yielding 10% then because its cheap wouldn't buyers buy the stock to make it yield 5% and give me a 50% share price rise ah now thats better now is that making 10% div while waiting for a 50% rise in my share price , sounds almost cosy .

 

[Julia]

So do i have to buy a stock yielding 5% have its share price fall 50% to make it yield 10 % , wouldn't it be better to buy the stock already yielding 10% then because its cheap wouldn't buyers buy the stock to make it yield 5% and give me a 50% share price rise ah now thats better now is that making 10% div while waiting for a 50% rise in my share price , sounds almost cosy .

If you are seriously thinking this is a reality, then we are all wasting our time trying to explain anything to you.

 

[skc]

So do i have to buy a stock yielding 5% have its share price fall 50% to make it yield 10 % , wouldn't it be better to buy the stock already yielding 10% then because its cheap wouldn't buyers buy the stock to make it yield 5% and give me a 50% share price rise ah now thats better now is that making 10% div while waiting for a 50% rise in my share price , sounds almost cosy .

Just remember there are 2 varibles in the calculation of yield.

For the yield to revert back to a more "normal" 5%, what you've outlined is one scenario... other possibilities include:

The dividend fall by half

The dividend fall by 75%, share price fall by half

Or any other combination of dividend and share price movement to make the yield 5%.

 

[robusta]

So do i have to buy a stock yielding 5% have its share price fall 50% to make it yield 10 % , wouldn't it be better to buy the stock already yielding 10% then because its cheap wouldn't buyers buy the stock to make it yield 5% and give me a 50% share price rise ah now thats better now is that making 10% div while waiting for a 50% rise in my share price , sounds almost cosy .

OK don't get so hung up on dividend yield, instead look for companies that have a competitive advantage and a history of growing profits then you might find that magic combination of capital gain and increased dividend yield the longer you hold.
Start with any of the four big banks, Woolworths, maybe Monadelphous....

 

[Boggo]

A graphical portrayal of dividend yield.

The chart on top is of one of my current holdings IDL. It went ex dividend today and has an annual dividend yield of approx 2.8% for the last year.

The chart below that is a weekly chart of a stock (which I don't hold) that has a dividend yield > 10%.

Which stock would you rather have ?

(click to expand)

 

[Julia]

Boggo, couldn't get a much better demo of the point than those two charts.

 

[nioka]

For the last financial year I held only one stock that paid me a dividend. In that time I have had the best year I have ever experienced with my investments. Dividend is only a small part of the "things" I look for in an investment. I only look for a dividend as being of value when it is associated with a company reaching its target. For example when LYC reaches the point of production and profits it will have reached its target and its ultimate share price.

Forget about dividends. The real gain is in capital appreciation.

 

[Boggo]

Boggo, couldn't get a much better demo of the point than those two charts.

A picture says a thousand words

Forget about dividends. The real gain is in capital appreciation.

Exactly, there are two areas though where a dividend can be an advantage.

In a SMSF fully franked dividends can save you a bit on tax as they have been taxed at 30% and you pay 15% so you get a 15% credit.

The other area that can be a worthwhile exercise is buying "hot" instalment warrants on the bigger stock as you get the full dividend and franking credit as if you fully owned the share but you can buy 2 or 3 warrants for less than the price of the one share.

It's all about timing on that process though as you need to time the entry so that you can then sell the warrant after it goes ex div without incurring a loss on the warrant and there are numerous other factors that need to be understood before you get involved in derivatives.
In a strong bull market look for stocks that are 2 to 4 weeks away from paying a dividend and look for and time your entry.

My

 

[prawn_86]

Forget about dividends. The real gain is in capital appreciation.

I think its horses for courses.

Dividends can be a great income source if you buy for a solid company not purely for the dividend. I am currently getting >7% on CAB and >8% on FLT based on my buy price on those 2 co's. Many other co's whose yield is now low, but if you bought when their shares got sold off your return is much better than the current stated yield.

Onviously capital appreciation is also a big factor, but not the only one imo.