Don't Chase High Yields

Investors should be wary about simply looking for the highest yields on offer. History shows that dividends from the highest yielding stocks can often be unsustainable

Henderson Global Investors 12 May, 2014 | 4:28PM

This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Ben Lofthouse and Andrew Jones, co-managers of the Henderson Global Equity Income Fund discuss why sustainability is important when it comes to income

In the current low interest rate environment investors are increasingly looking to equities for an attractive level of income. We are advocates of equity income investing for long-term total returns, and there are still lots of interesting opportunities around the world. Investors, however, should be wary about simply looking for the highest yields on offer. History shows that dividends from the highest yielding stocks can often be unsustainable.

That is one of the reasons why we believe investing across a diversified list of moderate paying companies, with the potential to offer both dividend and capital growth, is the best approach.

Sustainable Yields

The chart looks at the sustainability of dividend yields across developed markets between 1995 and February 2014 and highlights the risk of chasing high yields without considering the underlying strength of the company. It shows that in general, an estimated yield above 5% is less likely to be realised than a forecast yield of 5% or below.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Henderson Global Investors  Henderson Group PLC is engaged in the provision of investment management services.

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