High Dividend Yield Stocks? - Part 6

Read? High Dividend Yield Stocks? - Part 5

Most retail investors will love high dividend yield stocks. Me too and no exception. But just that I don't easily get excited over it.

High Dividend Yield

Recalling some pointers in the earlier posts

• Nothing is forever
• Just because a company pays a dividend now is no guarantee that it will forever, or that the company will even continue to exist. Nor is it any guarantee that the underlying stock is stable
• How does the high yield came about?
• The high yield come from the company paying out 90% of its earning as stock dividends. With little retained earning, it is very hard for the company to grow itself using internal financial resources.
• The high yield come from the company paying out less than 40-50% of its earning as stock dividends. The company has retained most of its earning either for financial cushions or to build up its internal resources to fund its future growth.

Sustainable dividend payment

Let assume:

Company A pays out 90% of its earning and that give you a 10% dividend yield while company B pays out only 40% of its earning and that also give you the same 10% dividend yield.

Which company do you think will be able to sustain your dividend yield at 10% if its future earning takes a hit?

What is your answer?

A or B?

Company A that pays too much of its earning as dividends will not be able to sustain the same dividend payout if its earning gets hit. It will have to reduce its dividend payout and cause your dividend yield to fall below 10%

Company B that pays less of its earning as dividends is in better position to sustain the same dividend payout even if its earning is reduced and your dividend yield is more likely to be sustainable at 10% over economy cycles.

Sustainable Growth

When the company keeps paying out most of its earning as dividends how can it build up its internal financial resources to grow the company? Its growth is not sustainable in the long run without its own internal significant war-chest.

That are two reasons why I don't like Company A.

Lastly

Have you ever wonder how come STI is approaching 3,000 and the current dividend yield of Companies A are still hovering at such high level?

Do you mean that the market is short of savvy investors not interested in accumulating high dividend yield stocks ah?

Think again!