Beware the clouds behind the silver lining of high dividends
PROPERTY group Sable Holdings was trading at a dividend yield of 121.5% this week - the highest on the JSE.
For investors looking for strong income flows, this could be good news - in comparison to its share price, Sable is paying out the highest dividends in the market.
The trouble is that nothing is as simple as it looks.
The dividend yield - calculated by dividing the total dividend received over the past year by the share price - can be a useful tool when evaluating a share, but it only shows part of a picture.
It must be used in conjunction with other ratios, like the price:earnings ratio, and after analysing fundamentals such as a company's management and its track record.
Basically the dividend yield is one of two returns received from the share. The other is the price gain over time which is influenced by expectations of future dividend yields.
According to Investec portfolio manager Jonathon Rogoff, those who chase high dividend yields usually do so at the expense of future growth.
Indeed, some of the most highly rated shares on the JSE have the lowest dividend yields.
Investec Holdings, for example, has a dividend yield of 1.2% while DataTec has one of 0.1%.
Companies like these plough their earnings back to fund further growth and shareholders are not complaining.
A high dividend yield can indicate that a company has run out of steam and is no longer expanding.
It has less of a need to retain funds and is prepared to pay out more to shareholders.
A large dividend yield may also show that the company is not highly rated by investors, that its share price is languishing even though it does make profits and is sharing these with investors.
This, it seems, is one of the reasons that Sable Holdings and other property groups currently dominate the list of companies with the highest dividend yields on the JSE.
Thanks to continual rent, property can provide investors with a steady "income" in dividends.
Property shares, however, just haven't performed lately, thanks to negative market sentiment and the decline of CBD areas.
Besides, most individuals are already heavily invested in property (their homes) and are not rushing to increase their exposure.
And, like interest in the bank, tax is also paid on some of the "income" from property shares.
Another problem with dividend yields is that they offer only historical information.
For example, some mining companies like East Daggafontein, St Helena and Ergo currently have among the highest dividend yields on the JSE.
Looking ahead, however, they are unlikely to match previous dividend payments in the current year because of the slide in the gold price.
According to Rogoff, around 35% of the companies listed on the stock exchange do not even pay dividends at all for reasons both good and bad.
They could be using earnings to fund future growth, they may be making a loss or they may be new to the JSE.
Mark Sonik, managing director of Consilium Capital, says when considering a company, potential buyers should evaluate whether they could do better by investing the money elsewhere - especially in less risky places such as a bank.
"The simple rule is that if a company cannot provide a better return, then it should have a higher dividend yield and pay out more of its earnings," he says.