Amidst the typical monetary policies adopted by central banks, the global market pertaining to government bonds has become highly volatile. According to a report, 36% of government issued bonds are trading negatively while the remaining 64% are trading at annual dividend growth of less than 1%.
Though US treasury bonds are performing considerably well, compared to the global bond market with an annual dividend growth of around 1.5%, not many investors are interested in investing in these bonds.
It is natural that investors are always keen to buy stocks that have high dividend yields, rather than government bonds, that have a nominal dividend growth. Though government bonds are the safest to invest in, the profit of a bond that takes ten years to mature isn’t producing great benefits for the investors.
Moreover, there is no increase in the interest rate of a bond for the term it is fixed for, even if the market conditions are favorable. This is making it harder for government bonds to find potential investors.
On the other hand, big players who are paying handsome dividends are attracting more and more investors. At this time, it is crucial for investors to understand that high dividend yielding stocks are not always the safest.
Here are a few risks an investor should consider before investing in high yielding stocks that have excelled this year:
Stocks from the utility sector – risks:
The top most high yielding dividend stocks for 2016 come from telecom and utility sectors. Though they haven’t performed well for the past couple of weeks, these stocks are still the leaders this year.
Not only individual investors but a good number of reputable companies have also invested in the utility sector given its unparalleled dividend growth. With today’s low interest rates, a dividend yield of 3.6% from the utility sector is attracting investors, both big and small alike.
Many exchange traded funds have made large indirect investments in the utility sector. iShares Select Dividend ETF (NYSEARCA: DVY) has invested 33% of its assets in utilities, while SPDR S&P Dividend ETF (NYSEARCA: SDY), has poured in 15% of its assets to purchase stock dividends in the sector.
- First and foremost, utility stocks sell at high price and hence the required investment capital is very high. These stocks trade at a price of 17 times earnings of the next year, making these stocks highly sophisticated for an ordinary investor to invest in.
- Utilities face a number of challenges and can get very volatile in the future. Some of these challenges are:
- Slow rate of improvement in growth earnings
- Government regulations which can be very uncertain
- Increase in the pace of steps being taken towards energy conservation
- Increasing demand of renewable energy alternatives
All of the challenges above are considered to be future threats for utilities.
- Apart from the above mentioned challenges, utilities are also facing some internal challenges. One of them is dividend payouts. The dividend yields that are announced to investors are not paid from the current earnings or the current annual cash flows, and this makes these dividend stocks less trustworthy and more risky as far as payouts are concerned.
Stocks from the telecom sector – risks:
As mentioned earlier, telecom dividend stocks have been one of the biggest players in the stock market this year after utilities. Though these dividend stocks are not highly priced compared to utilities, they have been recording excellent dividend growth for a few years now.
However, there are certain risks that investors should consider as far as the future prospects of these high dividend yielding stocks are concerned.
- The best telecom companies in the US are drown in debts
- They also have to bear significant expenditure commitments that they have made in the past
- For example AT&T (NYSE: T) – after the acquisition of DirecTV (NASDAQ:DTV) is facing troubles with a lackadaisical income growth aside from pricing headaches. Added to these is the interest it has to pay over the debt taken to acquire DirecTV.
- The capital expenditure is all set to increase even more as the plans of expanding DirecTV to Mexico and increasing its network coverage in the US is soon going to take off. This makes buying its dividend stocks a little risky at this time.
- On the other hand, Verizon (NYSE: VZ) is also facing quite a few troubles. Though it has recorded a better dividend growth compared to AT&T, it too has a good load of debts to clear. These heavy overheads came into play as result of Verizon buying back Vodafone’s shares in Verizon Wireless. These expenses have now become a concern for investors to buy Verizon dividend stocks at this time of the year.
Investors must take into account the risks involved in investing on stocks that are generating high profits. There might be many companies that have done exceedingly well in the past, but their present scenario and the dividend payout prospects for the future should be taken into consideration before investing your hard earned money in any high yielding dividend stocks.