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The 6 big problems with dividend shares

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As an older investor searching for passive revenue, I like dividend shares. Really, most of my household’s unearned revenue these days comes from these money funds that corporations make to their shareholders.

The downsides of dividend investing

In an excellent world, I may become profitable just by shopping for shares that supply market-beating dividends. Alas, this world is much from preferrred, so that is no ‘get wealthy fast’ scheme.

For instance, listed here are six issues that I’ve to take care of as a dividend disciple:

1. Just some shares pay out money

Nearly all shares within the blue-chip FTSE 100 index pay out dividends. Nonetheless, this proportion reduces quickly as I transfer into the mid-cap FTSE 250 and smaller corporations. That’s why the Footsie is my #1 searching floor for money streams.

2. Payouts are usually not assured

Sadly, future unpaid dividends are nearly by no means assured. Subsequently, they are often reduce or cancelled with hardly any discover. This occurred loads throughout the Covid-19 disaster and continues right this moment amongst corporations that have to protect money.

3. Yields are often historic

Once I lookup the dividend yield of a specific share, it’s essential for me to determine whether or not it’s a trailing (historic) or forecast (future) yield. Additionally, if a agency has not too long ago reduce its payout, then this is probably not completely obvious, so I all the time dig deeper into its public bulletins.

4. The dividend curse

Generally, listed companies that pay out giant proportions of their earnings in dividends neglect to speculate sufficiently in future development. When this occurs, I often discover it by recognizing long-term declines in share costs over, say, three and 5 years.

I name this impact — hefty dividends undercut by falling share costs — the ‘dividend curse’.

5. Debt and divvies

Paying out giant sums in money to shareholders over time can go away an organization’s steadiness sheet wanting shaky or stretched. Additionally, some companies favor to extend their web debt quite than prune payouts to their house owners.

6. The ex-dividend drop

The ex-dividend date is the day that new shareholders not accumulate the following dividend. Thus, shopping for inventory earlier than today secures me the dividend, whereas shopping for on or after the ex-dividend date means I don’t accumulate it.

Therefore, share costs often drop on ex-dividend dates to mirror the lack of this money reward.

Vodafone’s dividend dilemma

One traditional dividend share is Vodafone Group (LSE: VOD), the UK’s largest telecoms operator. My spouse and I purchased this inventory in December 2022 for 90.2p a share.

On Wednesday, 20 March, Vodafone shares closed at 67.28p, valuing the group at £18bn. Thus far, we’re nursing a paper lack of over 1 / 4 (-25.4%) on our buy. Moreover, this inventory has dropped 27.2% over one 12 months and has crashed 54.3% over 5 years (excluding dividends).

Notably, the agency’s yearly dividend payout has been frozen at €0.09 (7.7p) per share since 2019. This lack of development could also be a warning signal of cuts to return. Because it occurs, the group simply introduced that it’s going to halve this payout in 2025, consequently halving the dividend yield from 11.6% to five.3% a 12 months.

That mentioned, Vodafone intends to purchase again €4bn of its shares utilizing the sale proceeds of non-core companies. Subsequently, I’ve no intention of promoting our inventory for the instant future!


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