In the current environment of low-interest rates and paltry term deposit returns, it can be tempting for some investors to look for stocks with higher than average trailing dividend yields.
Investors need to be particularly cautious when it comes to stocks with unusually high dividend yields, as more often than not, the share prices of these stocks have been beaten down on the expectation that the historical dividend is not sustainable or the company is facing significant headwinds.
This is an important point and an issue where many investors get caught out – investors need to invest for the future capital gains and dividends of companies, not for their historical dividends.
While there are times where the market can get it wrong and can be overly pessimistic, investors need to be very careful when it comes to relying on analyst forecasts and historical dividends to make their investment decisions. Market conditions can change rapidly and investors need to adjust their investment decisions just as quickly.
So with these points in mind, here are three high-yielding stocks that I think investors should not be buying for their dividend yields:
1. Seven West Media Ltd (ASX: SWM) – The value of Seven West Media has almost halved over the past 12 months amid challenging market conditions. The traditional media and advertising sector has been in structural decline for a number of years and the outlook for the company remains challenging as non-traditional and digital media outlets take a larger slice of the advertising market. Although the shares trade on a very low price-to-earnings multiple of just 4 and offer a historical dividend yield of nearly 14%, the long-term investment case is far too risky in my opinion and is a stock that should be left to traders and short-term investors. Interestingly, the dividend has recently been cut, and analysts are forecasting a sharp drop in the dividend as well as earnings over the next two years.
2. Monadelphous Group Limited (ASX: MND) – The mining services sector has been particularly hard hit from the slowing of the mining boom and Monadelphous has been no exception. Although the company is probably the highest quality company in the sector and has exposure to other markets such as engineering and infrastructure, the company's earnings have suffered heavily as major miners and oil companies have looked to tighten their belts in an effort to combat the lower commodity price environment. Monadelphous cut its FY15 final dividend by 27% and although the company is trading on a trailing dividend yield of nearly 13%, it is likely that it will have to cut its dividend again in the coming year. The company itself is forecasting conditions to remain challenging over the next year and additional pressure on its operating margins means investors will have better investment opportunities elsewhere.
3. Sky Network Television Ltd (ASX: SKT) – Sky TV is New Zealand's dominant pay-TV provider very much like Foxtel is in Australia. The share price has fallen 25% over the past year, primarily from a disappointing earnings result and lingering concerns surrounding its ability to compete with new internet based providers like Netflix. Importantly for investors, Sky-TV is forecasting profits to fall in FY16 as a result of higher costs associated with new investments in content and products that it believes will help it to drive longer-term earnings. Despite a dividend yield of more than 6%, it is too early to predict the full impact of streaming media providers on the company's future earnings and whether or not the company's new investments will be able to reverse the negative market sentiment surrounding the stock. As a result, investors might be better off waiting on the sidelines until the future becomes clearer.
