For many investors, receiving a good dividend is their main focus when looking to purchase a stock. In some recent good news, Commsec stated that in the first quarter of 2022 $36 billion in dividends had been paid out, which was higher than the corresponding period in 2021. So, is this a good sign as to the health of the Australian stock market?
The answer depends on why the dividend payout increased. It could be because companies are enjoying good growth and consequently increased profits, and it makes sense to increase the dividend yield. That said, companies are often reluctant to increase dividend yields, as investors expect the yield to be maintained, which may not always be possible.
Another more likely reason is that in the last two years during the COVID pandemic, some companies stockpiled cash either to weather the potential storm or to use it for acquisitions. Now that economies are opening up and returning to more normality, the excess cash hasn’t been needed, so companies are adjusting their cash holdings accordingly.
Regardless of the reason, it is important for investors to understand that a high dividend yield is never guaranteed and this is why I always advise to invest for growth first and dividend yield second. I say this because a high dividend yield can result from a company’s share price falling heavily, which investors would be wise to avoid.
All too often, investors get caught catching a falling knife because they buy into a stock that has a high dividend yield only to see the share price continue to fall away. Let me say that it is not a good idea to chase a 7% or better dividend if you are losing 30% or more of your capital.
Unfortunately, when this occurs investors tend to validate their decision for buying the stock by saying that because they have not sold, they have not lost. But the better strategy would be to buy a rising stock that is also paying a good dividend. This just makes good investment sense.
Dale Gillham is chief analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au