too high?

[IanTHughes]

An offered possible reward of say 8.00%, when compared with another offered possible reward of say 6.00%, simply means that the investing public is demanding a higher possible reward for the former.

<whisper>
Because they're higher risk...
</whisper>

Do you know, I believe that you would still <whisper>such nonsense</whisper>, even if presented with conclusive evidence that the dividend from the 6.00% was about to be cut, and the dividend from the 8.00% was about to be raised!

The level of Yield of a given share is NOT A MEASURE OF RISK.

Rather it is A MEASURE OF REWARD being offered for taking that risk.

.
I feel sorry for you, or indeed anyone whose money is invested by someone not able to grasp that so simple concept!

Fortunately for you at least, knowing your preference for Managed Funds, Fund Managers of my acquaintance agree with my assessment!


ian

Moderator Message:
If the term "you" is used in an argument within the context of discussing shares then things are likely on the brink of being too personal (c.f. debt almost always preceding a bankruptcy). Please try to couch your arguments differently. Thanks - Chris

[BullDog]

An offered possible reward of say 8.00%, when compared with another offered possible reward of say 6.00%, simply means that the investing public is demanding a higher possible reward for the former. To determine the chances of a dividend cut, one must look at each possible selection in detail. And who knows, it is entirely possible that that one may conclude that the offered possible reward of 6.00%, is less safe than the 8.00%!

The investing public on the other hand does not ignore the risks to capital. If it demands a dividend yield of 8% rather than 6% is it not influenced by the belief that the higher yielding stock has greater risk of a capital loss? That is the way it works with corporate bonds, which are alternative means of financing a Company.

Rather than testing whether dividends are "sustainable", would it not be better, if not more difficult, to check whether profits or earnings were? After all, clever accounting can enable a Company to maintain a dividend by returning capital to investors, even if that isn't stated as a matter of policy.

You're wasting your breath. I agree with you.

Nobody knows what the future will bring beyond the very short term. Even that has surprises in store. Pretty much all analysis of companies is based on historical backward looking data and we all know where that leads. The market is littered with examples some quite recent others not so.

[88V8]

The level of Yield of a given share is NOT A MEASURE OF RISK.
Rather it is A MEASURE OF REWARD being offered for taking that risk.

I feel sorry for you, or indeed anyone whose money is invested by someone not able to grasp that so simple concept!
Fortunately for you at least, knowing your preference for Managed Funds, Fund Managers of my acquaintance agree with my assessment!

Fair point.
But given that managed funds are significant market players and price drivers, is not a fluctuating yield at least in part a reflection of their opinion?

Where this gets complicated of course is that dividends are not the focus of most investors. Far more are interested in growth. Hence we sometimes see a rise in SP following a divi cut, as more earnings are being retained in the company.
And even income investors can behave in a manner that seems illogical, eg those still buying GSK ahead of its well-trailed cut.

On the whole however, I continue to regard high yields as an amber flag, if there is such a thing.

V8

[moorfield]

I think what's been lost in this discussion of late is that it is high yields relative to the FTSE that reflect those risks.

[IanTHughes]

I think what's been lost in this discussion of late is that it is high yields relative to the FTSE that reflect those risks.

No its not. Relativity to the yield of the FTSE has absolutely nothing to do with the underlying risk of a dividend cut to any one single share.

For the umpteenth time:

The level of Yield of a given share is NOT A MEASURE OF RISK.
Rather it is A MEASURE OF REWARD being offered for taking that risk.

Ian

[kempiejon]

I think what's been lost in this discussion of late is that it is high yields relative to the FTSE that reflect those risks.

When I started buying I set the ftse100 average yield as my back marker. I'm fairly sure I have, on rare occasions, bought at below that plimsoll previously as I hold Unilever, Diageo and Reckitt Benckiser, perhaps a couple of others not usually considered high yield.
Personally, for my HYP, I prefer to pick above my portfolio average. In my HYP I have zero and low yielders like the names above but no more money for them. I do have some double digit yields too, none excluded from investigations for a top up.
I would usually prefer to buy above my portfolio average, this is above FTSE and CTY today this being a way to inch my income up if I can pick sustainable increasing yields. Inflation is adding a new wrinkle to that request. I feel a long-term increasing real income is looking a tougher ask my income is recovering to pre-Covid level. My utilities seem to offer inflating pacing income but let's what the rest of the bag kick out.

[IanTHughes]

No its not. Relativity to the yield of the FTSE has absolutely nothing to do with the underlying risk of a dividend cut to any one single share.

Losing some of your capital however is, at least in the opinion of the market.

A High Yield does not put the Capital at risk any more than a Low Yield

Seriously, if anyone disagrees with the statement:

The level of Yield of a given share is NOT A MEASURE OF RISK.
Rather it is A MEASURE OF REWARD being offered for taking that risk.

Then please simply explain how the yield, on its own with no reference to any other data, is a measure of risk.

All I am saying here is that, in order to assess the risk of loss, whether by way of a dividend cut or loss of capital, one has to study the underlying share - financial details, latest trading update, latest resuts ... etc ... etc ... Simply measuring the Yield will not give you any useful information with regard to that risk.

I am at a loss to understand why such a statement is considered so contraversial!


Ian

[ReformedCharacter]

Then please simply explain how the yield, on its own with no reference to any other data, is a measure of risk.

Ian

There's no such thing as yield with 'no reference to any other data'. The 'other data' is how the price and consequent yield are calculated by market participants.

RC

[IanTHughes]

Then please simply explain how the yield, on its own with no reference to any other data, is a measure of risk.

There's no such thing as yield with 'no reference to any other data'. The 'other data' is how the price and consequent yield are calculated by market participants.

Exactly!

Which is why the statement:

The level of Yield of a given share is NOT A MEASURE OF RISK.
Rather it is A MEASURE OF REWARD being offered for taking that risk.

Makes so much sense to me


Ian

[IanTHughes]

This thread is not discussing the Risk Premium - an investor's hoped-for reward for taking a risk, over and above what would be received when not taking said risk.

I have during my career, written much documentation with regard to Risk Premium, often referred to as Equity Premium Risk when discussing Equity Investment. For now, anyone not familiar with this term, can find a ready explanation right here: https://www.investopedia.com/terms/r/riskpremium.asp

What is being discussed, by me at least, is the risk of an individual share being subject to a dividend cut and whether that risk - the chance of a dividend cut - can be ascertained simply by looking at a share's yield (offered income reward), as determined by the market. I say it cannot.


Ian

[ReformedCharacter]

Then please simply explain how the yield, on its own with no reference to any other data, is a measure of risk.

There's no such thing as yield with 'no reference to any other data'. The 'other data' is how the price and consequent yield are calculated by market participants.

Exactly!

Which is why the statement:

The level of Yield of a given share is NOT A MEASURE OF RISK.
Rather it is A MEASURE OF REWARD being offered for taking that risk.

Makes so much sense to me

Ian

To be clear, I'll rephrase that:

There's no such thing as yield with 'no reference to any other data'. The 'other data' is how the price and consequent yield are calculated by market participants, therefore yield is a measure of the market's perception of risk.

RC

[IanTHughes]

There's no such thing as yield with 'no reference to any other data'. The 'other data' is how the price and consequent yield are calculated by market participants, therefore yield is a measure of the market's perception of risk.

I can only repeat once more:

The level of Yield of a given share is NOT A MEASURE OF RISK.
Rather it is A MEASURE OF REWARD being offered for taking that risk.

But you are correct in that it is the 'market' that is demanding/offering the MEASURE OF REWARD indicated by the Yield. It is up to an individual investor as to whether to accept that level of reward, or not.


Ian

[Bubblesofearth]

What is being discussed, by me at least, is the risk of an individual share being subject to a dividend cut and whether that risk - the chance of a dividend cut - can be ascertained simply by looking at a share's yield (offered income reward), as determined by the market. I say it cannot.


Ian

Do you have any evidence for that?

Here's some research that suggests there is a link between high dividend yield and a future cut;

https://www.brewin.co.uk/insights/dividend-risk

"For dividend yields above 6% the chances of a dividend cut rises rapidly, highlighting how a high yield can often reflect the market expectation that the dividend is not sustainable."

BoE

[Itsallaguess]

What is being discussed, by me at least, is the risk of an individual share being subject to a dividend cut and whether that risk - the chance of a dividend cut - can be ascertained simply by looking at a share's yield (offered income reward), as determined by the market. I say it cannot.

Do you have any evidence for that?

Here's some research that suggests there is a link between high dividend yield and a future cut;

https://www.brewin.co.uk/insights/dividend-risk

"For dividend yields above 6% the chances of a dividend cut rises rapidly, highlighting how a high yield can often reflect the market expectation that the dividend is not sustainable."

Indeed, and I think it's worth quoting from the article further -

Earlier this year our Research Team carried out a study into the risk of dividend cuts and compiled an analysis of the safety, or otherwise, of UK dividends paid by a wide variety of companies.

We studied 35 years of monthly historic data to examine how many instances of dividend cuts had actually occurred during that time and how the probability of a cut changed depending on the level of the dividend yield.

Our analysts then estimated the probability of a dividend cut for each of the companies for which they provide recommendations.

The results are instructive.

As well as the intuitive result that large companies are less likely to cut their dividends than smaller companies, we also found that there is a slightly greater chance of a dividend cut for companies that offer a dividend yield of between 0% and 2% than for those who offer a dividend yield of between 2% and 4%.

For dividend yields above 6% the chances of a dividend cut rises rapidly, highlighting how a high yield can often reflect the market expectation that the dividend is not sustainable.

We are already using this research to influence how we invest for our clients, helping to reduce the risk of cuts to income which will also support total returns, given that a cut to the dividend is often accompanied by a fall in a company’s share price.

https://www.brewin.co.uk/insights/dividend-risk

So not only does that broad and in-depth study confirm that higher yields are indeed at higher risk of being cut, those that perhaps still might invest for income in ultra-high-yield investments because 'even half the initial yield will still be acceptable' would do well to focus on the final sentence in the above quote...

Cheers,

Itsallaguess

[moorfield]

Funnily enough Moneyweek magazine also has a piece on dividend investing this week.

I can't find a URL link, but here is one line, page 15. My bold.

A high yield is often a warning sign - markets don't like to hand out free money, and if a yield is much higher than the market average, it often signifies scepticism about a company's ability to pay it.

[88V8]

Funnily enough Moneyweek magazine also has a piece on dividend investing this week.

A high yield is often a warning sign - markets don't like to hand out free money, and if a yield is much higher than the market average, it often signifies scepticism about a company's ability to pay it.

It may also be an indicator that the share is deemed non-growth - IMB, BATS, DEC - where the divi is a compensation.

I do agree though, whilst taking Ian's point that a relatively high yield may be sustainable, I still think it is a shorthand flag that it may not. So if one is disinclined to pore over the entrails of corporate accounts, the simple metrics of yield and cover may be a good starting point in compiling a list of 'safer' potential candidates.

V8

[IanTHughes]

What is being discussed, by me at least, is the risk of an individual share being subject to a dividend cut and whether that risk - the chance of a dividend cut - can be ascertained simply by looking at a share's yield (offered income reward), as determined by the market. I say it cannot.

Do you have any evidence for that?

Here's some research that suggests there is a link between high dividend yield and a future cut;

https://www.brewin.co.uk/insights/dividend-risk

"For dividend yields above 6% the chances of a dividend cut rises rapidly, highlighting how a high yield can often reflect the market expectation that the dividend is not sustainable."

As an HYPer I have naturally read this article, and others as well. What I would really like to see is the underlying research and some detailed information as to how RAPIDLY the chances of of a dividend cut rises, as well as what percentage is meant by the word OFTEN. The conclusion that incidents of dividend cuts increases with yield, is hardly rocket-science! Anyone who is serious about investing in High Yield equities could probably conclude the same, assuming they kept appropriate records, I know I could.

As an investor, an HYPer, I do not invest in percentages, rather I invest in individual shares. Also, I know that any yield - High or Low - may be hiding the possibility of a Dividend Cut. What the yield cannot answer for me is: "is this yield, for this individual share, hiding one of those future dividend cuts, or not?". As an HYPer this is important to me, on account of my desire to maximise the income return from my portfolio as best I can.

I want to find those future dividends not being cut. Refusing to invest in high yields, however one defines that term, simply ensures that one has decided to accept a lower income return - I do believe that my income would have suffered with such a strategy. Some may find that acceptable, especially if a lower yield is all that is needed. I am not such a person.

So, in an attempt to answer that so-important question - "is this yield, for this individual share, hiding one of those future dividend cuts, or not?" - one has to delve deeper than just reading the yield!


Ian

[IanTHughes]

Funnily enough Moneyweek magazine also has a piece on dividend investing this week.

I can't find a URL link, but here is one line, page 15. My bold.

A high yield is often a warning sign - markets don't like to hand out free money, and if a yield is much higher than the market average, it often signifies scepticism about a company's ability to pay it.

Also from Moneyweek, an interesting article with regard to the 12.3% yield of Persimmon (PSN)

https://moneyweek.com/investments/stock ... mon-shares

The company’s growth suggests cash returns will continue

Based on these factors, I’m pretty confident that Persimmon can hit the City’s dividend targets for the next year or two at least. After that, it’s a bit harder to tell where the property market will go and if demand will fall. Nonetheless, for the time being at least, the fundamentals for the business appear strong.

Ian

[BullDog]

Funnily enough Moneyweek magazine also has a piece on dividend investing this week.

I can't find a URL link, but here is one line, page 15. My bold.

A high yield is often a warning sign - markets don't like to hand out free money, and if a yield is much higher than the market average, it often signifies scepticism about a company's ability to pay it.

Also from Moneyweek, an interesting article with regard to the 12.3% yield of Persimmon (PSN)

https://moneyweek.com/investments/stock ... mon-shares

The company’s growth suggests cash returns will continue

Based on these factors, I’m pretty confident that Persimmon can hit the City’s dividend targets for the next year or two at least. After that, it’s a bit harder to tell where the property market will go and if demand will fall. Nonetheless, for the time being at least, the fundamentals for the business appear strong.

Ian

I challenge you - If that yield is not a measure of risk, then please tell us on Monday morning you invested all your money into Persimmon shares. If you don't do this then I am afraid you blow your entire argument out of the water.

[IanTHughes]

Funnily enough Moneyweek magazine also has a piece on dividend investing this week.

I can't find a URL link, but here is one line, page 15. My bold.

A high yield is often a warning sign - markets don't like to hand out free money, and if a yield is much higher than the market average, it often signifies scepticism about a company's ability to pay it.

Also from Moneyweek, an interesting article with regard to the 12.3% yield of Persimmon (PSN)

https://moneyweek.com/investments/stock ... mon-shares

The company’s growth suggests cash returns will continue

Based on these factors, I’m pretty confident that Persimmon can hit the City’s dividend targets for the next year or two at least. After that, it’s a bit harder to tell where the property market will go and if demand will fall. Nonetheless, for the time being at least, the fundamentals for the business appear strong.

I challenge you - If that yield is not a measure of risk, then please tell us on Monday morning you invested all your money into Persimmon shares. If you don't do this then I am afraid you blow your entire argument out of the water.

I never said there was no risk!

If you must respond to my posts, please respond to what I actually write!


Ian