MENU

2 High Yield Shares You Might Want To Be Wary Of

A share’s dividend yield is often an important selection criterion for investors who are on the lookout for income. After all, the higher the yield is for a share, the larger the dividend the investor can collect per dollar invested.

But while some high-yielding shares might be legitimate bargains, some might be more appropriately labelled as potential traps.

You see, dividends are ultimately paid out using cash and companies that can’t bring in the cash from its daily business operations would have to continually dip into its cash reserves to pay dividends. But, there are only so many times a company can dip into the cookie jar before it finishes its cookies. When that happens, the company has to either cut its dividend, or rely on borrowings to continue funding those pay-outs.

Neither scenario is attractive for investors. When dividends are cut, investors would be left with one less stream of income. If a company has to resort to borrowings to pay dividends, it’s actually heaping financial risks onto itself.

As such, when it comes to dividends, it pays to take a closer look underneath the hood to see if a company can actually earn the cash it needs to pay those dividends.

Based on their current share prices and annual dividends for their last completed financial year, the following two shares, Debao Property Development (SGX: K2M) and Aspial Corporation (SGX: A30), have historical yields of 5.6% and 7.7% respectively. That’s much higher than the Straits Times Index’s (SGX: ^STI) yield of only 2.6% at its current level of 3,296 points.

Although the yields on those two shares might intrigue income investors who are on the hunt for big dividends, it’ll pay for such investors to know what they might be getting themselves into with both shares.

Firstly, quick scans of both companies’ cash flow statements show that they’ve not been able to generate any meaningful amount of cash from their operating activities at all.

Operating cash flow

Year

Debao Property Development*

Aspial Corporation*

2008

-67.6

26.0

2009

22.4 -28.2

2010

5.17 -58.7

2011

-67.9

-91.4

2012 -32.9

-266

2013 -55.2

-188

Total -196

-607

*Figures are given in S$, millions.

Source: S&P Capital IQ

Secondly, the situation depicted in the table above has partially resulted in both companies gradually taking on more debt – as seen below – due to a need for capital to fund their daily operations as well as dividend payments.

Net debt (total debt minus total cash & short-term investments)

Year

Debao Property Development* Aspial Corporation*

2008

146 89

2009

73 123

2010

-166

187

2011 -7

290

2012 92

562

2013 207

768

*Figures are given in S$, millions.

Source: S&P Capital IQ

Given the following two factors – increasing levels of leverage as well as a lack of positive cash flow – it’s perhaps fair to say that those two high-yielding shares sure do come with some risks.

That said, none of the above is a call for investors to avoid both companies altogether; for all I know, their businesses might already have started turning around.

Rather, it’s meant to point out some important aspects investors have to keep an eye on when looking for dividend income.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.