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

More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete today
people'I’d rather have Fred and Rose West quote my characters on childcare'
Life and Style
The new Windows 10 Start Menu
Arts and Entertainment
There has been a boom in ticket sales for female comics, according to an industry survey
comedyFirst national survey reveals Britain’s comedic tastes
Bruce Chatwin's novel 'On the Black Hill' was set at The Vision Farm
travelOne of the finest one-day walks you could hope for - in Britain
footballManchester City 1 Roma 1: Result leaves Premier League champions in danger of not progressing
Arts and Entertainment
Gay and OK: a scene from 'Pride'
filmsUS film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
Life and Style
Magic roundabouts: the gyratory system that has excited enthusiasts in Swindon
motoringJust who are the Roundabout Appreciation Society?
Arts and Entertainment
Hilary North's 'How My Life Has Changed', 2001
booksWell it was good enough for Ancient Egyptians and Picasso...
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

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Trust Accountant - Kent

    NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

    Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

    £18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

    Law Costs

    Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

    Day In a Page

    Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

    The children orphaned by Ebola...

    ... then rejected by surviving relatives over fear of infection
    Pride: Are censors pandering to homophobia?

    Are censors pandering to homophobia?

    US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
    The magic of roundabouts

    Lords of the rings

    Just who are the Roundabout Appreciation Society?
    Why do we like making lists?

    Notes to self: Why do we like making lists?

    Well it was good enough for Ancient Egyptians and Picasso...
    Hong Kong protests: A good time to open a new restaurant?

    A good time to open a new restaurant in Hong Kong?

    As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
    Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

    Paris Fashion Week

    Lagerfeld leads a feminist riot on 'Boulevard Chanel'
    Bruce Chatwin's Wales: One of the finest one-day walks in Britain

    Simon Calder discovers Bruce Chatwin's Wales

    One of the finest one-day walks you could hope for - in Britain
    10 best children's nightwear

    10 best children's nightwear

    Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
    Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

    Manchester City vs Roma

    Five things we learnt from City’s Champions League draw at the Etihad
    Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

    Trouble on the Tyne

    Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
    Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

    Isis an hour away from Baghdad -

    and with no sign of Iraq army being able to make a successful counter-attack
    Turner Prize 2014 is frustratingly timid

    Turner Prize 2014 is frustratingly timid

    The exhibition nods to rich and potentially brilliant ideas, but steps back
    Last chance to see: Half the world’s animals have disappeared over the last 40 years

    Last chance to see...

    The Earth’s animal wildlife population has halved in 40 years
    So here's why teenagers are always grumpy - and it's not what you think

    Truth behind teens' grumpiness

    Early school hours mess with their biological clocks
    Why can no one stop hackers putting celebrities' private photos online?

    Hacked photos: the third wave

    Why can no one stop hackers putting celebrities' private photos online?