Are some high dividend yields merely a mirage?

High dividend yields can be dangerous to your wealth.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

To the uninformed, investing for yield is straightforward.

Simply look for the highest yield on the market today, and buy.

But there are dangers with this approach and the worst way to blow up your hard-earned cash is to find out after the event that the yield you were chasing was a mirage.

Three stocks at the moment are paying fully franked dividends and appear, at first glance, to be dishing out exceptionally attractive yields:

Remembering that these yields are trailing yields — the last twelve months of dividends as a percentage of today's share price — you'll need to ask yourself whether you think the dividend will rise, stay the same, or fall from the current level.

And if the price recently has fallen, you have to ask yourself why.

The higher the return, the higher the risk; and there's a real risk these dividends could fall from current levels given the performance of each company and the challenging industry environments they operate in.

The Vita Group share price have fallen in response to changes — read: reductions — to its remuneration arrangements between it and Telstra. Adairs' share price is down substantially since November last year when it provided the market with a poor trading update, and Myer is down from its 12 month high of $1.46 — and down from its float price in 2009 of $4.10 — to trade now at around 74 cents, also due to a [continued] challenging retail trading environment.

Given there's no guarantee of a return to higher profitability for each of these businesses, it might be best to assume that the current dividends will fall from this point which could of course expose you to capital losses, even from these low share prices.

The best way forward is to look for companies that pay dividends that are both sustainable and rising.

In that light, you have better options.

Just click on the link below to gain access to our free report which lists what we think are our top 5 dividend paying stocks for 2018.

Motley Fool contributor Edward Vesely has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »