The juicy-looking yields you see in the newspaper aren't always what they seem.
Last issue we discussed some important questions to ask yourself before buying a stock on the basis of its dividend yield. This time we're going to focus on applying those lessons in a practical sense. To do this, we've taken a selection of stocks, together with their published dividend yields, and we'll take a look to see how they stack up on closer inspection. The stocks we've chosen are listed in the accompanying table.
We'll assume, for starters, that you took our pledge in the last issue and are only considering stocks that you understand. The second point, then, concerns whether a stock is in a particularly cyclical industry. If that's the case, then its yield may be deceiving during boom times.
Residential construction makes for a good example. Several of the stocks listed in our table—AV Jennings, Central Equity, Crane Group and Kresta—are significantly affected by this sector of the economy. On 12 May, after revealing a 60% slump in profit for the year to 31 March, the management of AV Jennings (Australia's largest homebuilder) highlighted that the sector is in a 'cyclical downturn', which has been 'occurring for about one year'. Management believes it can maintain or grow the company's 11 cent fully franked dividend but, by pricing the stock on a fully franked yield of 7.5%, investors would appear to be sceptical about this (the negative operating cash flow and rising debt don't engender a great deal of confidence).
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