I have written before about the potential merits of investing in a portfolio of high yield shares, both for those in the wealth building phase and those seeking an income from which to live. But in my view the success of the strategy will lie more in the ability to identify sustainable and growing income streams which can be the most difficult thing to get right when fishing in this particular sea. As a minimum we would want to see our income growing at least with inflation, particularly if we are relying on it to meet our living expenses.
The problem is, too many high yield investors focus more on the size of the dividend yield rather than whether the dividend looks sustainable and therein lies the danger. There is nothing like a tantalisingly high yield to evoke the deadly sin of greed and brush fundamental analysis under the carpet.
As a value investor, I subscribe to the idea that the market can, for periods of time, mis-price shares and create opportunities to purchase them below their intrinsic value. But when it comes to dodgy dividend payouts, the market eventually manages to sniff them out and pushes the dividend yield way above normal levels in expectation of either poor growth at best, or at worst a cut in the dividend.
By “way above normal levels”, this is usually relative to the market yield, say the FTSE All Share yield. Some people think that the happy hunting ground for high yield investors is generally in the range of 100 to 150% of the market yield. Higher than that and we might well find the occasional bargain share to interest the value investors, but we should remain alert to the fact that the market’s nose for a smelly payout may be operating efficiently, particularly the higher we go above that.
I thought it would be useful to illustrate the above point by looking at four shares from the FTSE350 which have cut their dividends during 2013. In each case we will look at their dividend yield history over the last 10 years and compare it to the market yield, or rather a band showing the range referred to above of 100 to 150% of the FTSE All Share yield. The four shares are RSA Insurance (LON:RSA), Aviva (LON:AV.), FirstGroup (LON:FGP) and Halfords (LON:HFD).
1) RSA Insurance
RSA Insurance…
