Escaping the dividend trap

If the past decade is anything to go by, income is about to have its turn in the sun.

Recently interviewed by Livewire markets for their annual income series,  Talaria Co-CIO Hugh Selby-Smith spoke about the importance of income historically, in the current decade and in particular for Australian investors who rely heavily on company dividends.

To be clear, income as a factor, and yield as a component of total return, is fairly volatile. And dividends get caught up in that.

“When markets draw down, historically [income] tends to have a greater leverage to that drawdown than other factors,” says Hugh.

“When people are least comfortable about the outlook for the capital component of total return, dividends are cut. And that’s not that companies are unable to pay dividends, it’s that management – given the great level of uncertainty around market falls – makes the prudent decision to preserve cash until they have greater certainty about the needs of the business.”

Companies that maintain their dividend often do so at the cost of total return. The banks are a good case in point.

“They pay fairly consistent high dividends, but a lot of the time they’ve been issuing stock to pay for it,” says Hugh.

Read the full article here.