too high?

[funduffer]

Super HYs are at least worth a look for HYPs to consider their fundies and estimated div sustainability in the near future of a year or two as far as poss.

If HYPs are supposed to be for the relatively unsophisticated investor (correct me if I'm wrong), I'm not sure how they are meant to assess this.

I agree.

Learning how to assess company financial fundamentals with respect to dividend sustainability is perhaps the least understood aspect of running a HYP.

Despite all the thousands of threads on this board, I can't remember one that gives simple practical advice on how to do this. Company accounts are pretty difficult to understand - especially for large FTSE 100 companies, and what is fundamentally important for dividends seems to change according to whether the company is a bank, a REIT, an insurance company or some other entity. It is a difficult subject.

Indeed, I launched a thread on precisely this subject a year ago, and had zero responses!

viewtopic.php?f=15&t=34997

A beginners guide would be great.

Does such a thing exist?

FD

[Itsallaguess]

There is no "too high" and I've long said that it is wrong to reject super high yielders mechanically, for that reason alone, and have reiterated this opinion on the similar thread running on the other board.

Well I'd like to give credit to part of your post on that other thread, and I think it's worth copying here for completeness so that it allows us to comment on it in relation to this thread -

Surely [super high yielders] are worth some examination so that even though many might well be junk, there could be some irrational HYs which market sentiment has valued wrongly.

Anyone who has followed the market for more than five minutes must be aware that irrational valuations can last a long time and can be seriously extreme at times. This can deliver opportunity to the HYPer.

The trick is to try and distinguish junk from irrational valuations which is not easy.

Source - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=39759&p=601368#p601368


Whilst the above reads a little like something you'd perhaps write with your old Value hat on, rather than being directed at someone who's looking for a reliable and regular income-stream, I think even with that said, your final sentence hints at some welcome common ground in this particular debate...

Cheers,

Itsallaguess

[csearle]

Moderator Message:
May I remind posters that this board, as per its guidelines, is for investors who are interested in practical aspects of running an HYP rather than for discussing whether the set of strategies has merit. That can be done elsewhere. Such off-topic posts will continue to be removed without warning. Thanks. - Chris

[Dod101]

If HYPs are supposed to be for the relatively unsophisticated investor (correct me if I'm wrong), I'm not sure how they are meant to assess this.

I agree.

Learning how to assess company financial fundamentals with respect to dividend sustainability is perhaps the least understood aspect of running a HYP.

Despite all the thousands of threads on this board, I can't remember one that gives simple practical advice on how to do this. Company accounts are pretty difficult to understand - especially for large FTSE 100 companies, and what is fundamentally important for dividends seems to change according to whether the company is a bank, a REIT, an insurance company or some other entity. It is a difficult subject.

Indeed, I launched a thread on precisely this subject a year ago, and had zero responses!

viewtopic.php?f=15&t=34997

A beginners guide would be great.

Does such a thing exist?

FD

I know, something simple. How about treating any yield of more than twice say the City of London IT yield with suspicion?

Dod

[IanTHughes]

Super HYs are at least worth a look for HYPs to consider their fundies and estimated div sustainability in the near future of a year or two as far as poss.

If HYPs are supposed to be for the relatively unsophisticated investor (correct me if I'm wrong), I'm not sure how they are meant to assess this.

From the very first article, it was always recommended that investors using the High Yield Portfolio (HYP) strategy should satisfy themselves that any dividend appears to be sustainable. Furthermore it was always advised that the best way to do so was by way of published Company Accounts.

This advice was not yield dependent but was for all share selections, whatever the yield. For this reason, anyone who believes themselves to be incapable of doing such a check, cannot begin to satisfy themselves as to the sustainability of any yield, and would be well advised to leave the share selection to a someone who is capable.

Enjoy!


Ian

[moorfield]

If HYPs are supposed to be for the relatively unsophisticated investor (correct me if I'm wrong), I'm not sure how they are meant to assess this.

From the very first article, it was always recommended that investors using the High Yield Portfolio (HYP) strategy should satisfy themselves that any dividend appears to be sustainable. Furthermore it was always advised that the best way to do so was by way of published Company Accounts.

This advice was not yield dependent but was for all share selections, whatever the yield. For this reason, anyone who believes themselves to be incapable of doing such a check, cannot begin to satisfy themselves as to the sustainability of any yield, and would be well advised to leave the share selection to a someone who is capable.

Enjoy!


Ian

So humour us. What in Vodafone's Annual report tells us its dividend is sustainable, or not? 10.8% yield, too high, imo.

It is right here, [Deletion]
https://investors.vodafone.com/sites/vo ... report.pdf

Moderator Message:
Please refrain from provocation. Thanks - Chris

[funduffer]

From the very first article, it was always recommended that investors using the High Yield Portfolio (HYP) strategy should satisfy themselves that any dividend appears to be sustainable. Furthermore it was always advised that the best way to do so was by way of published Company Accounts.

This advice was not yield dependent but was for all share selections, whatever the yield. For this reason, anyone who believes themselves to be incapable of doing such a check, cannot begin to satisfy themselves as to the sustainability of any yield, and would be well advised to leave the share selection to a someone who is capable.

Enjoy!


Ian

Go on then, Ian. What aspects of company accounts do you look at? Which parameters do you consider are pertinent to dividend sustainability?

Someone like you, who has such a confident grounding in all things HYP could perhaps share some of that knowledge, or at least indicate how we might acquire it.

FD

[funduffer]

To help us all, I asked ChatGPT (an AI tool) the following:

Tell me how an investor can check for the sustainability of the dividend paid by a company.

Here is its reply:

“When an investor is assessing the sustainability of dividends paid by a company, they typically consider several factors to make an informed decision. Here are some key steps an investor can take to evaluate the sustainability of a company's dividend:

1. Analyse the dividend payout ratio: The dividend payout ratio is the percentage of a company's earnings that is paid out as dividends to shareholders. A high payout ratio indicates that a significant portion of the company's earnings is being distributed as dividends, which may be sustainable if the company has consistent and stable cash flows. However, an excessively high payout ratio might suggest that the dividend is not sustainable in the long term.

2. Examine the dividend history: Evaluate the company's track record of dividend payments over time. Look for consistent dividend growth or stable dividend payments, as this can indicate the company's commitment to returning value to shareholders. Irregular or inconsistent dividend payments might indicate financial instability or management's unwillingness to prioritize dividend sustainability.

3. Assess cash flow generation: A company's ability to generate strong and consistent cash flows is crucial for sustaining dividend payments. Analyze the company's cash flow from operating activities and compare it to its dividend payments. If a company consistently generates healthy cash flows that comfortably cover dividend obligations, it is more likely to sustain its dividend payments.

4. Consider earnings stability: A company with stable and predictable earnings is more likely to sustain its dividend payments. Look at the company's historical earnings growth, profitability ratios, and overall financial health. A company with fluctuating or declining earnings may face challenges in maintaining its dividend over the long term.

5. Evaluate the company's industry and competitive position: Assess the company's industry dynamics and competitive landscape. If the company operates in a mature and stable industry with limited growth prospects, it might have fewer opportunities to reinvest earnings and could choose to distribute them as dividends. On the other hand, companies in high-growth industries might prefer to reinvest earnings to fuel expansion and may offer lower dividends or none at all.

6. Review the company's debt levels: Excessive debt can strain a company's financial resources and impact its ability to sustain dividend payments. Evaluate the company's debt levels, debt repayment obligations, and interest coverage ratio. A highly leveraged company might have to prioritize debt servicing over dividend payments.

7. Monitor dividend policy and management's communication: Read the company's financial statements, annual reports, and earnings releases to understand management's views on dividend sustainability. Look for any guidance or commentary regarding future dividends and the company's overall financial strategy. Regular and transparent communication from management is important in assessing the sustainability of dividends.

It is crucial to remember that dividend sustainability depends on various factors and can vary from one company to another. Investors should perform comprehensive research, consider multiple indicators, and consult with financial professionals to make informed investment decisions.”

Not bad advice!

Note, this was generated by an AI tool, so do not take this as advice from a human being!

FD

[Dod101]

Thanks funduffer. There might be something in this AI technology! I would say that is excellent advice.

In summary, avoid cyclical industries and watch the cashflow, although the other factors mentioned are all worthwhile examining if you have the time and inclination.

Dod

[idpickering]

[Deletion]
With regards to "To high", I think one has to use ones' own common sense as to how high is to high with regards to higher yielding shares imho. In short, if it looks to good to be true, ie the yield, then that may well be the case.

Ian.

Moderator Message:
Part citing a now-deleted post removed. - Chris

[IanTHughes]

From the very first article, it was always recommended that investors using the High Yield Portfolio (HYP) strategy should satisfy themselves that any dividend appears to be sustainable. Furthermore it was always advised that the best way to do so was by way of published Company Accounts.

This advice was not yield dependent but was for all share selections, whatever the yield. For this reason, anyone who believes themselves to be incapable of doing such a check, cannot begin to satisfy themselves as to the sustainability of any yield, and would be well advised to leave the share selection to a someone who is capable.

So humour us. What in Vodafone's Annual report tells us its dividend is sustainable, or not? 10.8% yield, too high, imo.

It is right here, [Deletion]
https://investors.vodafone.com/sites/vo ... report.pdf

I did try to respond to your request but, it would appear that criticising your need to make such a request, even asking for your reasons for making such a request, is not allowed!

C'est la vie!

Enjoy!


Ian

Moderator Message:
For clarity: the aforementioned response was deleted in its entirety at the responder's request. - Chris

[kempiejon]

With regards to "To high", I think one has to use ones' own common sense as to how high is to high with regards to higher yielding shares imho. In short, if it looks to good to be true, ie the yield, then that may well be the case.

Ian.

But Ian it may well not be the case, we'd only know by doing some further investigation to confirm one way or another. I use dividend cover and company debts, dividend growth (or not) trends and take a squizz at some other metrics.

[pyad]

HYPs as understood here have been around a very long time, well over 20 years since I first started writing about the strategy on the old TMF. Over that time the issue of how to establish div sustainability has been discussed repeatedly. As IanT says, it's not an objective or mech process and various HYPers may well come to various conclusions about the same share.

Clearly, all serious share investment, apart from technical analysis, requires some consideration of the fundies depending on what the investor is seeking. Investment analysis is therefore not just an HYP strategy requirement, despite the disingenuous efforts of some here (probably non-HYPers) to try and isolate it as a weakness of the strategy, because all serious investors, whatever their style, will be carrying out some investigation depending on their aims. A dividend player or HYPer has the aim of trying to ensure that divs will be paid, at least in the near future. No guarantees of course but all share investment involves risk, both to capital and income.

Several pointers as to how to get an idea of div sustainability, at least short term, have been mentioned already though you don't need to overanalyse. Apart from quantitative considerations like gearing and div history etc. I'd add that you should read the latest accounts and news for indications of future divs in the directorspeak. For example LGEN has stated that divs for 23 and 24 will be increased by 5% each. Pretty good evidence of sustainability here imo. Few companies are that specific but they will often give some guidance.

What I disagree with is the idea of mech rejection of a share outright, without investigation, because the yield is "too high". But each to their own, if some HYPers wish to adopt that rule, good luck to them. I don't see much to argue about really. HYPers have always had their own pet ways of following the strategy, adapting it with their own views on analysis, tinkering etc. whilst still following the basic idea.

[torata]

Even Russ Mold of AJ Bell with his Telegraph Questor hat on has an opinion:

But a rule of thumb may provide comfort, one that was also a victim of ZIRP and QE. The axiom states that any yield more than twice the UK 10-year gilt yield is likely to prove too good to be true.
The UK 10-year is yielding 4.66pc....<Snip>

Questor piece on L&G (which is just below his limit)

https://www.telegraph.co.uk/investing/shares/life-insurance-legal-general-fixed-income/
But behind paywall.

torata

[Alaric]

It has nothing to do with HYPs specifically but applies to all styles of share investment where the investor wishes to use fundies for selection.

It's a particular problem for shares with high dividend yields where the management are being, shall we say, over optimistic with their earnings and profit statements. The reason being that it's hard cash leaving the Company in the form of dividend payments. A company aiming to give returns to shareholders by way of share price capital growth may be able to get away with an asset balance sheet consisting mostly of "goodwill", but you cannot pay "goodwill" out as a cash dividend. (Well I suppose you can, but only to the extent that borrowing facilities are available)

[pyad]

It's a particular problem for shares with high dividend yields where the management are being, shall we say, over optimistic with their earnings and profit statements. The reason being that it's hard cash leaving the Company in the form of dividend payments. A company aiming to give returns to shareholders by way of share price capital growth may be able to get away with an asset balance sheet consisting mostly of "goodwill", but you cannot pay "goodwill" out as a cash dividend. (Well I suppose you can, but only to the extent that borrowing facilities are available)

[Deleted]

As discussed repeatedly, anyone considering a super HY share for their portfolio needs to be particularly careful as far as poss that the div is sustainable but that has little to do with my reply to the other reader. And as I said, for those that auto reject SHY, then fine. HYPing comes in many variants.

Moderator Message:
Off-topic portion deleted(chas49)

[chas49]

Moderator Message:
I have deleted several posts which are off-topic for this board, and which were becoming unnecessarily personal.

If a post breaches the rules, report it, but do not reply to it saying it's off-topic. This just creates more off-topic debate and unnecessary work for the moderators (chas49)

[IanTHughes]

It has nothing to do with HYPs specifically but applies to all styles of share investment where the investor wishes to use fundies for selection.

It's a particular problem for shares with high dividend yields where the management are being, shall we say, over optimistic with their earnings and profit statements. The reason being that it's hard cash leaving the Company in the form of dividend payments. A company aiming to give returns to shareholders by way of share price capital growth may be able to get away with an asset balance sheet consisting mostly of "goodwill", but you cannot pay "goodwill" out as a cash dividend. (Well I suppose you can, but only to the extent that borrowing facilities are available)

Why is that a problem?

..... the management are being, shall we say, over optimistic with their earnings and profit statements

Is something that one can only ascertain as a result of a careful reading of the published Company Accounts. Once realised, one can take appropriate action, action that one could never even contemplate without having read the Company Accounts. Such information is certainly not evident by simply measuring the yield.

Enjoy!


Ian

[Alaric]

Why is that a problem?

Carillion self destructed not only by declaring profits that hadn't been made yet and perhaps never would, but also sustained their dividend payouts by borrowing. When it finally went bust, there was absolutely nothing left.

[IanTHughes]

It's a particular problem for shares with high dividend yields where the management are being, shall we say, over optimistic with their earnings and profit statements. The reason being that it's hard cash leaving the Company in the form of dividend payments. A company aiming to give returns to shareholders by way of share price capital growth may be able to get away with an asset balance sheet consisting mostly of "goodwill", but you cannot pay "goodwill" out as a cash dividend. (Well I suppose you can, but only to the extent that borrowing facilities are available)

Why is that a problem?

..... the management are being, shall we say, over optimistic with their earnings and profit statements

Is something that one can only ascertain as a result of a careful reading of the published Company Accounts. Once realised, one can take appropriate action, action that one could never even contemplate without having read the Company Accounts. Such information is certainly not evident by simply measuring the yield.

Why is that a problem?

Carillion self destructed not only by declaring profits that hadn't been made yet and perhaps never would, but also sustained their dividend payouts by borrowing. When it finally went bust, there was absolutely nothing left.

So? Surely that simply reinforces the need to carefully review the Company Accounts, where of course all company borrowings are laid out and explained in some detail. Information that would have told one of the problem with regard to the company's borrowings.

Restricting one's investigation to a simple measurement of the yield, would have given up no such information

Enjoy!


Ian