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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
Dakota Johnson as Anastasia Steele in Fifty Shades of Grey
film
Sport
Bafetibis Gomis of Swansea City is stretchered off at White Hart Lane
football
News
Jerry Seinfeld Comedians in Cars Getting Coffee
peopleSitcom star urges men to be more supportive of women than ever
Life and Style
Living for the moment: Julianne Moore playing Alzheimer’s sufferer Alice
health
News
Jay Z
businessJay-Z's bid for Spotify rival could be blocked
Sport
footballLouis van Gaal is watching a different Manchester United and Wenger can still spring a surprise
News
The spider makes its break for freedom
VIDEO
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Arts and Entertainment
books
News
people
Sport
Ashley Young celebrates the winner for Manchester United against Newcastle
footballNewcastle v United player ratings
Life and Style
love + sex
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Graduate Application Support Analyst

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Christine McCleave: FP&A Analyst

    £36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Day In a Page

    War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

    Baghdad fights to win back Tikrit from Isis – but then what?

    Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable
    Living with Alzheimer's: What is it really like to be diagnosed with early-onset dementia?

    What is it like to live with Alzheimer's?

    Depicting early-onset Alzheimer's, the film 'Still Alice' had a profound effect on Joy Watson, who lives with the illness. She tells Kate Hilpern how she's coped with the diagnosis
    The Internet of Things: Meet the British salesman who gave real-world items a virtual life

    Setting in motion the Internet of Things

    British salesman Kevin Ashton gave real-world items a virtual life
    Election 2015: Latest polling reveals Tories and Labour on course to win the same number of seats - with the SNP holding the balance of power

    Election 2015: A dead heat between Mr Bean and Dick Dastardly!

    Lord Ashcroft reveals latest polling – and which character voters associate with each leader
    Audiences queue up for 'true stories told live' as cult competition The Moth goes global

    Cult competition The Moth goes global

    The non-profit 'slam storytelling' competition was founded in 1997 by the novelist George Dawes Green and has seen Malcolm Gladwell, Salman Rushdie and Molly Ringwald all take their turn at the mic
    Pakistani women come out fighting: A hard-hitting play focuses on female Muslim boxers

    Pakistani women come out fighting

    Hard-hitting new play 'No Guts, No Heart, No Glory' focuses on female Muslim boxers
    Leonora Carrington transcended her stolid background to become an avant garde star

    Surreal deal: Leonora Carrington

    The artist transcended her stolid background to become an avant garde star
    LGBT History Month: Pupils discuss topics from Sappho to same-sex marriage

    Education: LGBT History Month

    Pupils have been discussing topics from Sappho to same-sex marriage
    11 best gel eyeliners

    Go bold this season: 11 best gel eyeliners

    Use an ink pot eyeliner to go bold on the eyes with this season's feline flicked winged liner
    Cricket World Cup 2015: Tournament runs riot to make the event more hit than miss...

    Cricket World Cup runs riot to make the event more hit than miss...

    The tournament has reached its halfway mark and scores of 300 and amazing catches abound. One thing never changes, though – everyone loves beating England
    Katarina Johnson-Thompson: Heptathlete ready to jump at first major title

    Katarina Johnson-Thompson: Ready to jump at first major title

    After her 2014 was ruined by injury, 21-year-old Briton is leading pentathlete going into this week’s European Indoors. Now she intends to turn form into gold
    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot