The 6 big problems with dividend shares
Picture supply: Getty Photographs
As an older investor searching for passive revenue, I like dividend shares. Really, most of my household’s unearned revenue these days comes from these money funds that corporations make to their shareholders.
The downsides of dividend investing
In a perfect world, I might earn a living just by shopping for shares that supply market-beating dividends. Alas, this world is much from very best, so that is no ‘get wealthy fast’ scheme.
For instance, listed here are six issues that I’ve to cope with as a dividend disciple:
1. Just some shares pay out money
Nearly all shares within the blue-chip FTSE 100 index pay out dividends. Nevertheless, this proportion reduces quickly as I transfer into the mid-cap FTSE 250 and smaller corporations. That’s why the Footsie is my #1 searching floor for money streams.
2. Payouts will not be assured
Sadly, future unpaid dividends are virtually by no means assured. Due to this fact, they are often minimize or cancelled with hardly any discover. This occurred lots through the Covid-19 disaster and continues at this time amongst corporations that must protect money.
3. Yields are often historic
After I search for the dividend yield of a selected share, it’s essential for me to determine whether or not it’s a trailing (historic) or forecast (future) yield. Additionally, if a agency has lately minimize its payout, then this might not be solely obvious, so I all the time dig deeper into its public bulletins.
4. The dividend curse
Generally, listed companies that pay out giant proportions of their earnings in dividends neglect to take a position sufficiently in future development. When this occurs, I often discover it by recognizing long-term declines in share costs over, say, three and 5 years.
I name this impact — hefty dividends undercut by falling share costs — the ‘dividend curse’.
5. Debt and divvies
Paying out giant sums in money to shareholders over time can depart an organization’s steadiness sheet trying shaky or stretched. Additionally, some companies choose to extend their web debt fairly than prune payouts to their house owners.
6. The ex-dividend drop
The ex-dividend date is the day that new shareholders now not acquire the subsequent dividend. Thus, shopping for inventory earlier than at the present time secures me the dividend, whereas shopping for on or after the ex-dividend date means I don’t acquire it.
Therefore, share costs often drop on ex-dividend dates to replicate the lack of this money reward.
Vodafone’s dividend dilemma
One basic dividend share is Vodafone Group (LSE: VOD), the UK’s largest telecoms operator. My spouse and I purchased this inventory in December 2022 for 90.2p a share.
On Wednesday, 20 March, Vodafone shares closed at 67.28p, valuing the group at £18bn. Up to now, we’re nursing a paper lack of over 1 / 4 (-25.4%) on our buy. Moreover, this inventory has dropped 27.2% over one yr and has crashed 54.3% over 5 years (excluding dividends).
Notably, the agency’s yearly dividend payout has been frozen at €0.09 (7.7p) per share since 2019. This lack of development could also be a warning signal of cuts to return. Because it occurs, the group simply introduced that it’ll halve this payout in 2025, consequently halving the dividend yield from 11.6% to five.3% a yr.
That mentioned, Vodafone intends to purchase again €4bn of its shares utilizing the sale proceeds of non-core companies. Due to this fact, I’ve no intention of promoting our inventory for the instant future!