Dividends not always a recipe for success

Despite the current clamour for high yielding stocks in a sluggish market, big dividend yields aren’t always a recipe for investment success according to Goldman Sachs Australia’s head of Australian equities Dion Hershan.

Very often those big yields aren’t sustainable, and if you had bought a basket of high yielding stocks leading up to the global financial crisis in general they were a train wreck, he said.

Hershan estimated around two thirds of the top 20 yielding stocks in the Australian market needed to cut their yields. “You need to do more than scratch the surface and find out what is sustainable. We’re conscious that the yield itself is not the answer,” he said.

Some sectors such as the banks are likely to maintain sustainable yields of around 7 per cent, and possibly the property trust sector which has been repaired considerably since the GFC, he said.

Such stocks could appeal to personal investors such as self-managed super fund trustees because those yields are higher than what they would be likely to receive in a term deposit. But they would need to be careful they weren’t buying a company with a 6.5 per cent yield but whose profit would drop by 30 per cent in the next year resulting in a drop in yields, he said.

Hershan compared current market sentiment with the fourth quarter of 2008 when investors were clamouring for safety and buying companies with good balance sheets, good management teams and good yields. But when confidence turned in the marketplace in the first quarter of 2009 a lot of those stocks were left for dead, and the big opportunities were in some of the more cyclical names, he said.

“We don’t have a crystal ball in terms of when things are going to turn but we are seeing some good long-term opportunities. It’s just going to require patience.”