Searching for Dividend Yield

Friday, 28th July 2017 16:29 - by Eric Chalker

When searching for shares to place in a portfolio for income, beware of false dividend information.  The true dividend yield may not be as stated.  There are several reasons for this, quite apart from the question of sustainability which I do not deal with here.  This article is limited to the question of accuracy, but dividend issues are a more complex subject than at first it may appear, so I expect to add to these observations in a future article.

Although I am aware of software packages that provide several useful facilities, including calculation of dividend yields, I have not yet felt sufficiently disadvantaged to need one.  I therefore cannot comment on the accuracy of the data they provide, but I strongly suspect that the flaws I have found elsewhere will also be found there.  It is certainly the case that the results of a screening tool I have seen, supposedly listing ‘high yield payers’ found by a ‘sieve’, produced a very mixed bunch, with some that I considered completely inappropriate for inclusion.

Newspaper listings

My principal source of dividend yield (DY) information has always been newspaper listings.  Here I focus on three: The Daily Telegraph (DT) which lists 540 equity prices including American and European companies, Financial Times (FT) which in addition to the world’s largest companies (the FT500) lists 800 UK equity prices and The Times which lists 1,370 UK prices.

Newspapers are readily available (albeit increasingly expensive) and it is easy to run one’s eye down the page to see where the currently good DYs are.  This is just the start, though, because the DYs shown cannot be trusted.  Over the years I have found many quite shocking errors, but there are also companies for which the standard method of calculating the DY hides the truth.  One reason for this is that special dividends may be excluded from the data and yet some companies pay these on a fairly regular basis.

One example of the latter is Lancashire Holdings (which I hold).  In the last 3 years it has paid dividends averaging 88.6p a year.  On the opening price this week that is a DY of 12 per cent, but two of the newspapers silently exclude the special dividends and show the DY as 1.6 per cent or less.  Other examples are U & I (a property company, which I hold) and InterContinental Hotels (which I don’t).  However, it appears the DT does include special dividends in the latter, because it shows the DY as 5.5 per cent and not 1.6 per cent as in the FT and Times.

Significant differences between newspapers in the DY data given are not uncommon.  For this article, in a random sample of 14 shares listed by all three papers, I found 8 quite significant differences in the DY in addition to InterContinental Hotels.  This is way over half.  The FT and Times appear always to agree, but the DT shows a higher DY for 5 shares and a lower DY for 3; these differences range from 3% to 78%, with the average 18%. 

Looking further

London South East (LSE) company pages are another source of DY information, of course.  This is particularly useful for shares that come to notice but cannot be found in a newspaper especially as, like in a newspaper, the DY moves daily with the share price.  Even so, LSE also fails to show the impact of special dividends and I have found other DYs that do not appear to fit the facts, but otherwise LSE tends to align with the FT and Times.

Further study might explain all the differences I have found in my research, but that’s not the point.  The point by now should be clear.  On the one hand, if the DY is attractive to you, check that it is by finding the last 12 month’s dividends actually paid (and any announced and not yet paid if that is your wish), then do your own calculation.  On the other hand, be alert for companies that pay special dividends, especially those which do it regularly.  

One reason for differences is that a dividend yet to be paid might be included once it has been announced.  I suspect that this happens sometimes.  Investors Chronicle goes further, with a tendency to base DY on estimates of future dividends, which can be misleading. 

Special cases

REITs – real estate investment trusts – are a special case.  Income from a REIT is in two forms.  One is an ordinary dividend paid from taxed profits in the usual way.  The other is a ‘property income distribution’ (PID), which is a distribution of untaxed rental income and will normally be the larger payment.  So far as I have been able to see, the two payments are usually lumped together when calculating the DY, which can be misleading, because PIDs are subject to 20 per cent tax in the hands of a private investor and the true DY of a REIT will consequently be less than is stated.  However, there is an exception to this, because ISA providers are able to claim back the PID tax and credit it to the investor’s account, which adds 25% to the PID value.

Some companies make tender offers for shares rather than pay a dividend; this is sometimes described as a DY (eg CLS Holdings in the DT) but not always (eg CLS Holdings in the FT and Times).  Banco Santander pays dividends but sometimes calls its distributions a return of equity; this may be why LSE shows the DY as nil, whereas newspapers show it as 3.1 per cent or more.  Some companies (Rolls-Royce comes to mind) issue B or C shares instead of a dividend, which can be surrendered for cash: returning equity is still a form of yield, but for shares not held in an ISA or SIPP this creates additional work when completing a CGT return.

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.