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Direct Domestic Shares

Twofold downside to chasing yield

A fund manager has warned there is a danger of experiencing double negative results if investors allow yield to dominate their decisions when acquiring Australian stocks.

ASR Wealth head of Australian equities research Tim Montague-Jones told delegates at the recent Australian Shareholders’ Association National Conference 2019 in Melbourne yield can be unpredictable and a fall in dividends is a common experience among investors chasing yield-producing shares.

Montague-Jones pointed to Telstra, AMP and National Australia Bank as being prime examples of equities that disappointed investors with regard to the dividends they paid out.

He said not receiving the expected dividends was only one downside investors chasing yield experience from their stock purchases.

“When the yield or dividend gets cut, the exit is quite savage and the share price comes down and the [associated] capital loss removes any potential gain you would have made with that yield,” he noted.

Again, he used Telstra as an example of a share that had experienced this type of phenomenon.

“After the last four-and-a-half years, Telstra’s share price, if you’d have purchased it over that period of time, obviously you would have lost quite a lot of capital value,” he added.

“For the share price to recover its loss over the last four-and-a-half years it has to go up 110 per cent from here.”

He said for this stock in particular he thought it was a lot to ask.

“The problem with Telstra is increased competition in the marketplace, which means they need to cut their pricing, which means a cut to earnings, which is a cut to cash flow and a cut to dividends,” he said.

As a result, he recommended individuals be wary of any advice they receive suggesting Telstra shares were a good yield play currently.

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