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Fairpoint’s move from high yield to zero yield is a wake-up call
Thursday 15 Dec 2016 Author: Daniel Coatsworth

Income is the dominant theme in this week’s edition of Shares. We talk about what to buy, what to avoid and discuss income issues specific to people in retirement.

Dividends are one of the most important factors coveted by investors when weighing up which stocks or funds to buy. They are the reward for the risks associated with putting money in stock markets anywhere in the world.

Sadly the world of income is more complex than you might initially think. You need to be clued up on the different types of yield information available in the market and how dividends are funded in order to ascertain whether they are sustainable.

Beware the numbers

One of the key points in the main feature this week is the importance of not assuming dividends are guaranteed payments. A company isn’t always going to pay the dividends forecast by analysts, so you need to be careful when using screening services on financial websites and not pick stocks simply because they have a high prospective yield.

We ran some numbers on the market when preparing this week’s issue of Shares; the result included a 13% prospective yield from legal services group Fairpoint (FRP:AIM). The company has subsequently issued a profit warning and said dividends are likely to be suspended.

Stock screening websites won’t change their Fairpoint data until new forecasts are issued, which could take days or weeks. At the time of writing Fairpoint’s share price slump had pushed up the prospective yield to 39%.

Clearly that is incorrect, but how would you know unless you saw Fairpoint’s announcement last week? It is a classic example of why you should always undertake further research once you’ve found some investment ideas.

More cuts?

The dividend cuts theme seen in 2015 is back on the agenda. Mitie (MTO) and EasyJet (EZJ) recently cut their payments. Aberdeen Asset Management (ADN) could be next, analysts suggest.

Glencore’s (GLEN) decision to reinstate dividends from 2017 bucks the trend, but housebuilder Berkeley (BKG) takes the debate in a new direction.

Having promised £10 per share in dividends by September 2021, some of this money will be used instead for share buybacks. While that should improve earnings per share, it does reduce the amount of physical cash from dividends that Berkeley investors had expected to go in their pocket.

Dividends will continue to be a surprise – just not always a good one.

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