Investors, Beware These Big Dividend Yields

When it comes to investing for dividends, it’s easy for investors to fall into a trap of chasing high yielding shares solely due to the presence of high yields.

It’s a dangerous way to invest because a share’s dividend yield tells us nothing about its underlying business – and it’s the strength of a share’s underlying business which provides the fuel for future dividends.

These four shares, Aspial Corporation (SGX: A30), Excelpoint Technology Ltd  (SGX: E17), Oxley Holdings Ltd  (SGX: 5UX), and Tye Soon Ltd  (SGX: T08), all carry very high historical dividend yields of more than 5% based on their current share price and dividends paid for their last-completed fiscal year.

Those are really tasty yields given that the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks Singapore’s market barometer the Straits Times Index (SGX: ^STI), is only yielding 2.6%.

Table for dividend yields

Source: S&P Capital IQ

But, there is a danger sign in their business results which might cause investors to be wary of their future dividends and that is, their inability to produce operating cash flow. As you can see in the table below, none of the quartet has managed to generate positive operating cash flow in any of their last three completed-fiscal years.

Table for operating cash flow

Source: S&P Capital IQ

A company’s operating cash flow is simply the cash that its businesses have generated in any given time period. And since dividends are paid out with cash, it stands to reason that investors should keep a close watch on a company’s cash inflows in order to determine if there’s sufficient cash for outflows.

If a company’s business operations are not bringing in the cash, then it would have to depend on borrowings or the sale of shares in order to raise capital to fund its dividends. Neither options are particularly healthy as borrowings may impact the financial stability of the company while the sale of shares may dilute existing shareholders’ stakes in the firm.

Of course, there are always exceptions to the rule as companies that take on debt or issue shares to pay dividends can still be great income investments if their management teams prove to be very adept capital allocators. And for what it’s worth, a company’s cash flows is a backward-looking measure, so things might yet change going forward.

A Fool’s take

None of the above is meant to say that the quartet of Aspial, Excelpoint Technology, Oxley, and Tye Soon, would definitely see their dividends shrink in the future or that they would make for poor income investments.

Their management teams might already be in the process of improving their businesses, or their business environment might already have changed for the better. But, investors who are interested in them for their high-yields would have to wade in with their eyes wide open to all the potential risks involved.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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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 company mentioned.