The Dividend Quest

I have been hearing and reading a lot of content recently about investing in shares that pay good dividends.   Dividends are always nice to have and let’s face it, they provide income.

A popular strategy
The quest for dividends is a popular strategy and it is easy to see why it is popular and encouraged in times of uncertainty.  For those that like to chase dividend paying stocks, it also pays to consider the underlying strength of the business you are investing in.  The reason being is that if the business’ earnings are not sustainable, than neither will the dividends be.

Good dividend payers
To give a real life example, Telstra Corporation (ASX:TLS) shares traded at $8.29 in January 2000.  Today, they are trading at $3.65.  So, Telstra shareholders have endured a capital loss of $4.64 per share because the company “pays a good divvie”.  However, Telstra has paid $3.50 in dividends back to shareholders since January 2000 and that is including the 14 cents not due to be paid until September this year for the 2nd half of 2012 financial year.

The net effect is that Telstra shareholders who have invested $8.29 per share because of good dividends are still over $1.00 per share down on their investment twelve years later after dividends have been added back.

Choose sustainability
Telstra’s story provides one such example of the risks with investing just for dividends.  Dividends are wonderful however they should be just one consideration in your investment decision and not the only decision.  I could have chosen a litany of companies to demonstrate this scenario and this representation is based on hindsight not necessarily reflective of Telstra’s future.

Conversely, there are companies with sustainable business models that will see their share price appreciate over time, in line with the performance of the business, giving them the ability to continue paying good dividends.

Chase dividends by all means but consider one caveat, the business needs to be sustainable enough to keep producing profits from which to pay the dividends in good times and not so good times.

This article is written by Dean Mico.

The information provided in this article is intended for general use only.   The article is intended to provide educational information only.  Please be aware that investing involves the risk of capital loss.  The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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