Investors need to remember to consider the long-term sustainability of a company’s dividend, not just the current yield, according to DNR Capital.
There were several sectors which had paid strong dividends in the recent reporting season including financials but investors should be aware of their likelihood to continue at these levels.
Scott Kelly, manager of the DNR Capital Australian Equities Income fund, said: “Some companies currently paying high dividend yields may actually have low, or even negative earnings growth going forward. This will limit future dividends and will likely impact their share price too. It is important to be aware of these dividend traps.
“Pursuing a high-yield strategy, while ignoring other factors, is simplistic and fraught with danger. High yields can indicate companies are facing structural headwinds and dividends might be at risk of being cut.”
Instead, investors should consider a company’s dividend sustainability and seek out those quality companies which had to ability to grow their dividends over time.
The DNR fund had a dividend yield expectation of 4.5% which was almost 6% if dividends were grossed up for franking credits.
While around half of all ASX 200 dividend upgrades came from the financial sector in February, Kelly said the firm was still wary on this sector and had a 6% underweight to the big four banks as it foresaw long-term headwinds including disruption from fintech companies.