Picture supply: Getty Photos
As an older investor in search of passive earnings, I like dividend shares. Really, most of my household’s unearned earnings these days comes from these money funds that corporations make to their shareholders.
The downsides of dividend investing
In a super world, I might earn money just by shopping for shares that supply market-beating dividends. Alas, this world is way from perfect, 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
Virtually all shares within the blue-chip FTSE 100 index pay out dividends. Nonetheless, this proportion reduces quickly as I transfer into the mid-cap FTSE 250 and smaller corporations. That’s why the Footsie is my #1 looking floor for money streams.
2. Payouts aren’t assured
Sadly, future unpaid dividends are virtually by no means assured. Subsequently, they are often lower or cancelled with hardly any discover. This occurred loads in the course of the Covid-19 disaster and continues right this moment amongst corporations that must protect money.
3. Yields are normally historic
Once I search for the dividend yield of a specific share, it’s vital for me to determine whether or not it’s a trailing (historic) or forecast (future) yield. Additionally, if a agency has lately lower its payout, then this might not be fully obvious, so I at all times dig deeper into its public bulletins.
4. The dividend curse
Typically, 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 go away an organization’s stability sheet trying shaky or stretched. Additionally, some corporations want to extend their web debt reasonably than prune payouts to their house owners.
6. The ex-dividend drop
The ex-dividend date is the day that new shareholders now not accumulate the subsequent dividend. Thus, shopping for inventory earlier than this present day secures me the dividend, whereas shopping for on or after the ex-dividend date means I don’t accumulate it.
Therefore, share costs normally drop on ex-dividend dates to mirror the lack of this money reward.
Vodafone’s dividend dilemma
One traditional 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 12 months 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 come back. Because it occurs, the group simply introduced that it’s going to halve this payout in 2025, consequently halving the dividend yield from 11.6% to five.3% a 12 months.
That mentioned, Vodafone intends to purchase again €4bn of its shares utilizing the sale proceeds of non-core companies. Subsequently, I’ve no intention of promoting our inventory for the quick future!
