No Pain, No Gain: Don't be fooled - dividends are risky business

In these bleak, uncertain times, some of the traditional rules that govern investment decisions should be unceremoniously tossed out of the window. What were once regarded as invaluable guidelines, such as dividend yields and price earnings ratios, are now often completely useless.

A startling illustration is provided by HBoS. The published statistics say that the shares could offer an astonishing dividend yield of around 70 per cent. It's a joke – yet also another splendid illustration of that investment adage that the past does not guarantee the future. For the calculation compares the current share price with last year's dividend. It bears no relation to current – or future – prospects. I think every investor realises that the Government's bail out will prevent HBoS paying any dividend. Indeed, the bank was so strapped for cash that its last payment was made in shares. And to add insult to injury, the value placed on them for the dividend calculation was far too high. Lloyds TSB, expected to take over HBoS, is, under the rescue proposals, also unable to reward shareholders. Yet its shares offer a seemingly irresistible 21 per cent return.

Westminster may be forced to abandon its no-dividends-rule. Even so, I think it unlikely that Lloyds will feel able to justify that unprecedented yield.

It is not just the banks that are challenging the published statistics. What about BT? I said a few months ago, when the telecommunications behemoth offered a return of around 7 per cent, that there was little chance of any dividend cut. Well, I've changed my mind. The shares have continued to decline. If BT holds its payment, the payback will represent a 12 per cent return. Surely, too good to be true? Still, even if the distribution is halved, the yield is still attractive and would give the shares genuine income appeal.

Others with alleged sky-high yields include pub chains Enterprise Inns and Punch Taverns and that once indomitable retailer, Marks & Spencer. Punch has already said that it is cutting out its final dividend altogether, and there are obviously doubts whether the other two will hold their payments.

As for price earning ratios, there are some laughable calculations still being quoted. Like dividend yields, they are usually based on last year's performance. For example, Punch, at around 110p as I write, is selling at only 1.1 times last year's earnings. In March it was nearly six times. Last year, when the stock market was riding high – it seems light years away now – the shares topped 1,400p.

Prospective price/earnings ratios must also be suspect. The country is already in recession and many profit estimates should be taken with the proverbial pinch of salt.

With so many dividends in doubt, and shares in ragged retreat, shareholders are losing out on income as well as capital. HBoS' manoeuvre to offer shares instead of cash is unlikely to set a trend. Alleged yields suggest many dividends are threatened. Investors must brace themselves for cuts, some quite savage, and the complete disappearance of some dividends.

I hope my pessimism is misplaced. Some companies enjoy reasonable dividend cover and could be in a position to repeat last year's payment. Shares of high-yielders that hold their dividends are enticingly cheap. But for many, i t will be tight. For example, BT's last distribution was covered only 1.3 times.

The expected dividend casualties are not confined to well-known stock market names. There are some ridiculous yields among smallcaps. Pubs 'n' Bars, a constituent of the No Pain, No Gain portfolio, is offering a near 19 per cent return. Yet it has already missed its interim payment and may not pay a final.

I am, however, pleased to see that Mel Belligero, chief executive of the pubs chain, and Siva Namasivayam, finance director, have added to their shareholdings. It is also a buy story at financial group, Lighthouse, another portfolio constituent. Joint chief executive Allan Rosengren and another director, Alex Scott-Barrett, have lifted their stakes.

It is encouraging when directors buy shares in the company they run. Of course, it is not always a bear signal when they sell – sometimes the cash is really needed, say to help pay for a divorce or meet school fees. But it is impossible to regard director share sales as a vote of confidence.

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

New Articles
tvDownton Abbey Christmas special
Arts and Entertainment
Wolf (Nathan McMullen), Ian (Dan Starky), The Doctor (Peter Capaldi), Clara (Jenna Coleman), Santa Claus (Nick Frost) in the Doctor Who Christmas Special (BBC/Photographer: David Venni)
tvOur review of the Doctor Who Christmas Special
peopleIt seems you can't silence Katie Hopkins, even on Christmas Day...
Arts and Entertainment
Left to right: Stanley Tucci, Sophie Grabol and Christopher Eccleston in ‘Fortitude’
tvSo Sky Atlantic arrived in Iceland to film their new and supposedly snow-bound series 'Fortitude'...
Arts and Entertainment
Jenna Coleman as Clara Oswald in the Doctor Who Christmas special
tvForget the rumours that Clara Oswald would be quitting the Tardis
Arts and Entertainment
Japanese artist Megumi Igarashi showing a small mascot shaped like a vagina
The Queen delivers her Christmas message
newsTwitter reacts to Her Majesty's Christmas Message
Arts and Entertainment
Life and Style
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

    Christmas without hope

    Gaza fears grow that conflict with Israel will soon reignite
    After 150 years, you can finally visit the grisliest museum in the country

    The 'Black Museum'

    After 150 years, you can finally visit Britain's grisliest museum
    No ho-ho-hos with Nick Frost's badass Santa

    No ho-ho-hos with Nick Frost's badass Santa

    Doctor Who Christmas Special TV review
    Chilly Christmas: Swimmers take festive dip for charity

    Chilly Christmas

    Swimmers dive into freezing British waters for charity
    Veterans' hostel 'overwhelmed by kindness' for festive dinner

    Homeless Veterans appeal

    In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all