iHow a yield moves
The ASX glossary gives the sum: divide the dividend per share by the share price and express it as a percentage. Because the price is on the bottom of the fraction, the same dividend gives a higher yield on a cheaper share.
| Case | Dividend a year | Share price | Yield |
|---|---|---|---|
| Before | 50 cents | $10.00 | 5% |
| After the price falls | 50 cents | $6.25 | 8% |
Invented round numbers to show the arithmetic: 0.50 ÷ 10.00 = 5%, and 0.50 ÷ 6.25 = 8%. They describe no real company.
In the second row the yield is higher only because the shares are cheaper. The sum cannot say why the price fell, or whether the next dividend will be the same. Moneysmart lists a company’s dividend outlook, not only its dividend history, among the things to check.
iiFive risks a yield figure does not show
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Income
Lower or no dividends
Companies can reduce or stop dividends at any time, Moneysmart says. Even a listed investment company that keeps profits back to smooth its payments gives no guarantee of dividends.
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Price
Losing money on the shares
The price can fall below what you paid, and selling at that point can lock in the loss.
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Failure
The company going broke
When a company fails, its staff, lenders and suppliers are paid before its shareholders, who can end up with nothing.
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Concentration
Too much in one place
Moneysmart warns that owning shares in only one business that collapses could cost most or all of your money, and that whole industries can stay flat or lose value for years. Spreading money across companies and industries can reduce the impact of one performing poorly.
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Speed
Prices that move quickly
Share prices move with company results, interest rates, news and global markets, and they can move quickly. Moneysmart cautions that selling during a fall can lock in losses.
How diversification works across asset classes and countries is set out on Moneysmart’s diversification page.
iiiWhat sits behind a dividend
A dividend comes out of profit, so the questions that matter are about the business. Moneysmart suggests reading a company’s results, annual report and ASX announcements, and says its key numbers cover whether the business earns money and is growing, what it owes and whether it can carry that debt, where its cash really comes from, and its record and outlook for dividends.
The ASX glossary has a measure that joins profit and dividends. Dividend cover is net profit divided by the dividend paid: the number of times the dividend is covered by profit.
ivBuying just before a dividend
Buying shares shortly before they go ex-dividend does not make the dividend a bonus. Shares quoted cum dividend carry the current dividend, and the ASX glossary notes their price will usually reflect its amount.
The tax rules also look at how long you hold. Once your franking credits for the year reach $5,000, you must hold shares at risk for at least 45 days to claim the franking tax offset on them, and the ATO has a separate integrity rule against dividend washing. Both are set out in franking credits, and the dates in ex-dividend dates.
vInvestments sold on their income
Hybrid securities
Hybrids combine features of bonds and shares. Moneysmart calls them complex and potentially very risky: they may pay an income the way a bond does, yet their value can drop sharply the way a share’s can, and there is no guarantee on the amount and timing of their payments. Some can convert to shares that may be worth less than you paid, and some are written off completely if the issuer gets into financial difficulty, and the government guarantee that covers savings accounts and term deposits does not cover them. Its list of risks also covers having to sell quickly at a lower price, interest that can be deferred, being paid last if the issuer fails, and terms that can run for decades. Moneysmart advises getting financial advice before investing in one.
Offers that promise high income
Investment scammers often promise high returns with little or no risk, or guaranteed profits, and Moneysmart notes that legitimate investments always involve some level of risk. Its checklist on investment hype asks whether the person or business is licensed by ASIC, checked on ASIC’s Professional Registers Search, and whether you could afford to lose the money. High returns, it says, usually mean a higher risk of losing your money.
Moneysmart’s investment scams page lists the signs, and its hype checklist walks through the questions in full.