Investing for dividends

HIGH DIVIDEND SHARES: 10 PICKS OFFER A PROSPECTIVE +6% DIVIDEND YIELD

Investors need to do some work and rely on earnings and forecasts to get the most out of a dividend investing strategy.

Companies that pay bigger dividends are usually mature, with a long history and proven management. They are financially stable, have strong balance sheets and produce steady and growing profits every year.

As long as a share’s high dividend yield indicates these attributes, investors should expect good returns over the long term.

But a high (historic) dividend yield can also mean investors are uncertain of a firm’s prospects and don’t expect a high dividend. In this case, the high dividend yield results from a low share price reflect that investors dumped their shares after realising the company’s prospects had worsened.

Investors should rather use the forward dividend yield as a yardstick, using the expected dividend over the next 12 months to calculate the forward dividend yield.

We can identify over 20 shares that offer investors high forward dividend yields (10 showed here, full list on Moneyweb.co.za).

Technical challenges

All analyst forecasts are done according to a company’s financial year, while investors need uniform forecasts for the next 12 months to compare different shares’ dividend yields.

A second problem is the timing of dividend declarations and payments. Most companies pay an interim and a final dividend, but some only pay one annual dividend at the end of the financial year.

Our calculation of the forward dividend yield is based on the dividends an investor can expect over the next 12 months.

Verimark’s dividend yield is high because it produces satisfactory profit without having to re-invest large amounts of capital. It sells fast-moving goods, mostly in other people’s stores.

Also, the share doesn’t trade often as current shareholders aren’t willing to sell to eager buyers and the share price doesn’t reflect its intrinsic value.

Assore is just behind Merafe Resources and Kumba.

They all operate in the uninspiring business of blast, scoop, truck, crush and sell, which returns a solid profit in good times with little need for huge capital expenditure, but no possibility of remarkable new products and explosive growth.

An interesting entry that offers a high dividend yield is Coronation Fund Managers.

Coronation’s dividend has shown strong growth over the last few years and analysts seem to expect further growth over the next few years, while the share price has lagged the firm’s growth and good prospects.

Vodacom is now enjoying the fruits of years of expansion, high capital expenditure and very strong growth that resulted in enough clients to ensure good profits and strong cash flow, and high dividends.