Unsustainable yields - how to spot them

[JASpencer]

I'm really glad to see The Fool in exile. I thought it had gone, and very glad to see there are boards discussing the High Yield Portfolio.

So I have a question on this strategy, how do you spot the sustainable dividends. My first three investments included Shell and Morrisons, which both suspended dividends. While I think they will pay up eventually and being relaxed about this I could easily see this being a more general problem as high yielders are often (not always) high because they're unsustainable and the market has already priced that in.

[kempiejon]

Welcome to the board, sorry to start with a nit pick

My first three investments included Shell and Morrisons, which both suspended dividends.

For sure Morrisons but I have Shell and don't remember a cut, who was the other one?

[moorfield]

So I have a question on this strategy, how do you spot the sustainable dividends. My first three investments included Shell and Morrisons, which both suspended dividends. While I think they will pay up eventually and being relaxed about this I could easily see this being a more general problem as high yielders are often (not always) high because they're unsustainable and the market has already priced that in.

Indeed, are you sure of Shell ? (did you see what I did there...)

Anyway, it's a complex question. I've pondered before that an empirical approach might be one way of tackling it - for example, CLLN's yield on the Friday immediately before it's dividend announcement was 9.6% (Dividend 18.45p / Close 192.3p). That analysis could be repeated for every other company that has cut or suspended its dividend in recent years, and mean/median/modal values deduced for what Mr Market deems as "unsustainable" yield. I read somewhere once that Perceived Wisdom is 7%+.

[Wizard]

So I have a question on this strategy, how do you spot the sustainable dividends. My first three investments included Shell and Morrisons, which both suspended dividends. While I think they will pay up eventually and being relaxed about this I could easily see this being a more general problem as high yielders are often (not always) high because they're unsustainable and the market has already priced that in.

Indeed, are you sure of Shell ? (did you see what I did there...)

Anyway, it's a complex question. I've pondered before that an empirical approach might be one way of tackling it - for example, CLLN's yield on the Friday immediately before it's dividend announcement was 9.6% (Dividend 18.45p / Close 192.3p). That analysis could be repeated for every other company that has cut or suspended its dividend in recent years, and mean/median/modal values deduced for what Mr Market deems as "unsustainable" yield. I read somewhere once that Perceived Wisdom is 7%+.

So using that benchmark, what do folks think about:
Stagecoach - 7.71%
Marston's - 7.12%
Galliford Try - 7.04%

Sustainable?

Terry.

[kempiejon]

I read somewhere once that Perceived Wisdom is 7%+.

Of course there'll always be exceptions and to use Shell as an example I was able to get in at 10% a year or so back and so far no cut, I'm sure I topped up TATE for a very high forecast yield, there might be a few more 7% plus shares I've collected that are still intact.
I did hold Carillion and Greene King and had Royal Bank of Scotland on once in a life time yield.

[JASpencer]

Welcome to the board, sorry to start with a nit pick

My first three investments included Shell and Morrisons, which both suspended dividends.

For sure Morrisons but I have Shell and don't remember a cut, who was the other one?

Deep strategic blindness (there were other issues that "helped") but my brother mentioned this about a year ago and I've never bothered to look up.

The other one was Manx Telecom.

[PinkDalek]

Welcome to the board, sorry to start with a nit pick

My first three investments included Shell and Morrisons, which both suspended dividends.

For sure Morrisons but I have Shell and don't remember a cut, who was the other one?

Deep strategic blindness (there were other issues that "helped") but my brother mentioned this about a year ago and I've never bothered to look up. ...

Merely a guess but maybe your brother was thinking of BP's dividend suspension in 2010, following the Gulf of Mexico oil spill.

[JASpencer]

Welcome to the board, sorry to start with a nit pick

For sure Morrisons but I have Shell and don't remember a cut, who was the other one?

Deep strategic blindness (there were other issues that "helped") but my brother mentioned this about a year ago and I've never bothered to look up. ...

Merely a guess but maybe your brother was thinking of BP's dividend suspension in 2010, following the Gulf of Mexico oil spill.

No, don't think so. He does dabble in the stock market quite a lot so should know the difference between the two companies and this this was about a year or so ago. I've finally looked at Shell's dividends and it seems that they have gone flat rather than rising, which may be what he was talking about. It's plausible that he mistook no growth for a cut or I mistook what he was saying.

[monabri]

To my knowledge, shell have not suspended divis in 50 years. Here's the data for the last 17 years ( year 2000).

http://www.dividenddata.co.uk/dividend- ... ?epic=RDSB

As for the much quoted div cover I could cite Carillion and Provident who both had good div covers ....until they didn't!

It seems the shorters know more about a company than we do.....let's face it, they do this for a living, we dabble. Unfortunately, they too miss things ( Provident) but I think any company being heavily shorted should be considered very carefully. Here's a link to the shorttracker ( note Morrisons are 3rd most shorted company)

https://shorttracker.co.uk

I think though that when CEOs hide the truth ( Carillion, Interserve and Provident...the latter case, even Woody got caught out) then it can be very difficult to detect likely cutters.

Employ the usual " if it sounds too good to be true " method...!

[richfool]

Looking further down the full list of the "shorted" stocks, on page 5 I came across PHP (Primary Health Properties) which I hold. (3.4% short. 4 funds). Hmm. That's where a little knowledge becomes dangerous, as I don't know what conclusion to draw. At least its only on page 5. Maybe I should put head back in sand.

[DiamondEcho]

I think there are known knowns, and unknown knowns. Woodford getting tripped up by ProvFin would perhaps fall under the latter category.
Under the former, known knowns, you can try and identify them by looking at the accounts and seeking to identify trends in EPS, div cover, price-earnings growth and so on.
Perhaps diversification is one simple protection? Another might be reading the accounts and getting comfort that the revenue is from a diversity of activity. For example some service provider companies can be overly reliant on a smaller group of very large contracts, which tend to come up for re-tender every x years.

[Lootman]

I think there are known knowns, and unknown knowns. Woodford getting tripped up by ProvFin would perhaps fall under the latter category.
Under the former, known knowns, you can try and identify them by looking at the accounts and seeking to identify trends in EPS, div cover, price-earnings growth and so on.
Perhaps diversification is one simple protection? Another might be reading the accounts and getting comfort that the revenue is from a diversity of activity. For example some service provider companies can be overly reliant on a smaller group of very large contracts, which tend to come up for re-tender every x years.

I would simply take the view that any strategy that targets a yield higher than the market average is accepting a higher risk of loss in return for a higher running income and/or a recovery in the prospects of the underlying companies.

I don't think I am clever enough to identify which recovery/special situations will do well and which will fail. But I am fairly confident that I would be taking on more risk if I purposely target only securities that the market has deemed to be sufficiently suspect to warrant conferring a high yield to compensate for that risk. Yield is not a property of a share - it is a value assessment conferred by the market.

My own preference is to keep my yield aspirations modest, and focus instead on both the safety of that dividend and the rate of growth of it.

[Itsallaguess]

So I have a question on this strategy, how do you spot the sustainable dividends.

It might be more difficult to spot sustainable dividends than it might be to spot the unsustainable ones, although investment is sometimes seen as an art rather than a science, so I don't think there's an easy answer to the particular question that you're asking.....

Have a read of this interesting article, which was linked to on a different but similar thread last week -

The year has thrown up more than a few nasty surprises for investors, but learn to read the warning signs and you can sidestep potential hits from the market, says Phil Oakley.

Seeing a company you own lose a quarter or more of its value in one day (Provident lost nearly two-thirds of its value on the day of its warning) will test the resilience of even the most sanguine investor.

The good news is that, while you can’t avoid every nasty shock in the market, there are some common warning signs that alert investors could have spotted in all of these cases. Below I’ll talk you through six of the biggest red flags, and highlight four companies that you might want to re-examine if they’re in your portfolio right now....

http://moneyweek.com/how-to-shock-proof-your-portfolio/

Cheers,

Itsallaguess