QUOTE (Jack @ Mar 10 2010, 09:46 PM)
what about the capital losses ?
Good point Jack, Marcus Padley addressed this in a recent article.
"Income is often associated with safety. But here’s a little wake up call.
Anyone who bought the Babcock & Brown satellites a couple of years ago will tell you. Big yields mean big trouble. I remember some research on Babcock & Brown Power in March 2008 which said “BBP’s share price has fallen nearly 50% since early November and 35% this year alone. BBP looks cheap, trading on fully tax deferred yields of 14.7% for FY08 and 15.2% for FY09. The company’s medium term growth profile is excellent.”
14.7% yield going to 15.2%. Amazing. The problem of course was that even before the research was written the company had already paid their last ever dividend, four months earlier. They never paid another cent. The big yield was a fantasy. It’s called the yield trap.
Moral of the story, yield does not mean safety and stocks that pay over a 10% yield probably don’t and won’t. At least not for long. So whenever anyone waves a big yield at you give them this little gem. Rather than me buy your 10% yield you give me a dollar and I’ll guarantee you a 50% yield. “A 50% yield!?” they say “Wow” they say, “Let me just back up the truck there Marcus.”
Of course you take their dollar and after the first year you generously pay them back 50c. After two years you generously pay them back another 50c. After two years and a day you declare the company bankrupt. Net result, they get a 50% yield for 2 years but lose all their capital and you get a loan of 50c for a year and 50c for two years. Big yields are big trouble.
And if big yields are big trouble, high yields are a warning, a warning that a company is low growth, because no company can pay out a huge chunk of its earnings and still grow. Not for long. Yet so many Australians approach the stock market expecting income, spoilt perhaps by a bank sector, a protected oligopoly, that for over ten years has delivered it. Their performance has made Australians soft and as we have seen in the last year, ill prepared for any downturn in the market.
The Bank sector fell 68% in the financial crisis and incredibly on the day the Commonwealth Bank had a rights issue and fell 11% people were still saying “Its OK they’ll still pay the dividend” despite the fact they had just lost more than that in capital in a day.
If a company pays a big dividend in the US its shares fall, because it is an admission that the company thinks investors will be able to make use of the capital better than the company. What sort of message is that for shareholders? It’s an admission of defeat. In the US they buy bonds for income, not equities. Equities are for growth. Which brings up the debate, just what is the stockmarket for. Growth or income.
In Australia some of us think it’s for income. But it’s a joke, because when you focus on income you lose sight of the capital, which is far more important.
Take Telstra for instance. People buy Telstra for income. It pays 28c a year. But in the last year it has traded in a range of 135c. That’s almost five times the dividend. Even the banks. In the last year the NAB has paid 146c in dividends but traded in a range of 1652c, 11 times the dividend. The CBA has traded in a range 14 times bigger than the dividend, Westpac 11 times and the ANZ 12x. And these are the high yielding stocks. In fact it turns out that the average ASX 200 stock in the last year has traded in a range 22x bigger than its average dividend.
Whilst the stockmarket collapsed Australians held on…for income. We valued the 6% yields in banks too highly and valued income more than capital to our great cost. And this is the lesson. The capital at risk in the stockmarket is far more volatile and therefore far more important a focus than the income. Never ignore the share price just because of the dividend, no matter how big."
TGF Investment Chat, Over a latte in the Cafe with a copy of the Fin review under your arm
Mar 18 2009, 09:44 AM
