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3 Companies With at Risk Dividends

Worried about the sustainability of dividends in your portfolio? Dunedin Income Growth Trust manager Ben Ritchie names three stocks at risk

Emma Wall 20 March, 2018 | 1:01PM
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When is a high yield not an attractive income investment? When it is unsustainable. Dunedin Income Growth Trust (DIG) manager Ben Ritchie is repositioning his portfolio away for higher paying companies, in favour of lower yielding but more stable dividend stocks.

“We are shifting from high yield to income growth in order to ensure a sustainable income stream for investors,” he explains.

The trust has a very attractive historic yield of 4.7% and has grown or maintained its dividend every year for the past 36 years. But the manager is concerned by the stability of the current income provision and has spent the past two years re-focusing the portfolio, following a painful 2015 where the fund’s value fell 11.5% and the FTSE All Share lost only 4.6%. This served as a stark reminder that there is more to investing than chasing income.

“We are now focused on growing capital as well as a growing, sustainable yield,” Ritchie says. “We were relying on reserves to boost the dividend in the past but over the past two years have restored the dividend cover and reserves. If you focus too much on income it is not sustainable. Equally if you focus too much on capital growth you can’t grow the dividend. We want a blend.”

As a result, he is buying stocks with a lower starting yield than before, diversifying the offering. He is taking profits from his megacap success stories – such as Shell (RDSB) and Glaxo (GSK) – in order to fund the new holdings, which include Relx (REL), storage firm Big Yellow (BYG) and biotech firm Tecan (TEN). The new portfolio additions are typically small or medium sized businesses, and there are more overseas listed companies too.

As part of the new strategy, Ritchie and the team meet once a week and run through a list of companies where they are concerned the dividend is at risk. Inmarsat (ISAT) appeared on the list in recent months, and on March 9 slashed its dividend and warned of more cuts in pay-outs as annual earnings fell.

Current contenders include HSBC (HSBA), as Ritchie says: “How confident do we feel? We could envisage HSBC’s dividend getting cut.” Also on the list are AstraZeneca (AZN) and GlaxoSmithKline where he says there is a “heightened risk” the dividend will be cut.

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.

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About Author

Emma Wall  is former Senior International Editor for Morningstar