Investors are instinctivelysuspicious of high-flying dividends but today theyreabsolutely paranoid, as payoutscrash to earth again and again. Before investing in any stock, you need to be confidentthatthe dividend is secure, because if it plummets the share price will instantly follow.
Chinese Arithmetic
Global bank HSBC Holdings (LSE: HSBA) soared as investors clambered on board, delighted by its exposure to booming Asia and China, unaware of the turbulence ahead. Briefly labelledthe good bank afterthe financial crisis because it didnt need a government bailout, performance has been pretty dreadful since, with the stock now30% lower than it was five years ago.
Itcontinues to fall, dropping 15% in the last six months, as China wreaks havoc on the global stage. This leaves it trading at a tempting 10.4 times earnings, and crucially for income seekers, yielding a juicy 7.2%. Butis the yield now flying too close to the sun?
Cover bother
Currently, HSBCs yield iscovered 1.4 times, which is relatively respectable. But just as you should never judge a book solely by its cover, you also have to dig deeper with the dividend. Last year, Standard Life fund manager Thomas Moore did just that, and ended up offloadingHSBC, warning ofpedestrian dividend growth or worse. With the bank shedding jobs to cut costs, and forcedto set aside increasing amounts of capital to appease regulators, Moore warned thatfunding the payout will prove tough. That was half a year before China crashed.
High compliance costs, fines and low interest rates will make it tough for Stuart Gulliver to fulfil his pledge toboost shareholder payouts. Last year, 50,000 jobs were culled in a bid to keep the income flowing, while unprofitable units were dumped. Worryingly, Gulliver is doubling down on his losing China/Asia bet, whilethe market meltdownimperils investment banking profits. The dividend looks securefor now, but Gullivers gamble must pay offto ensure its covered in the yearsaead.
Our friend electric
If you hold utility giant SSE (LSE: SSE) in your portfolio, youre almost certainly doing it for the income asgrowth prospects have been less than electric in recent years. That said, it has done exactly what utility stocks say on the tin, providing defensive solidity in troubled times, with the share price down just 4% over the last year. Over five years, its up a solid 18%, while the FTSE 100 is slightly down over the same period.
SSE is nevertheless all about the yield, and it currently distributesaheartwarming 6.31% covered 1.3 times, slightly belowmanagements long-term target of 1.5. Until relatively recently, management was promising above-inflation dividend payouts, and still says it will hike the dividend at least in line with RPI inflation (1.2% in December). That will prove quite an effort, given thatcash flow didnt cover the dividend last year.
As with HSBC, SSEspayout looks safe for now, but the flat outlook for revenues and profits over the next year suggests managementfaces an uphill struggle fulfillingits pledges to investors in the longer term.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended HSBC Holdings. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.