Principles Of Dividend Investing Need Rethink

A crash course in income investing would quickly throw up a reference to large, established companies offering the highest dividend payouts. On a sector basis, this certainly appears to be the case with defensive sectors such as telecoms and utilities again expected to provide the highest average dividend yield in 2012. However, there are growing reasons to question the over-reliance on these traditional income stalwarts, with an approach based on the quality and sustainability of dividends likely to deliver stronger returns over the longer term.

The challenges facing traditional income payers are best illustrated by the telecoms sectors. Firms within this sector are expected to generate an impressive dividend yield of 5.5% this year. However, a deteriorating market environment, with the possibility of recession in Europe looming and consumers less willing to splash out on high-end smartphones, is expected to add pressure to these firms’ ability to maintain both revenue and dividend growth. The utilities sector is another traditional favourite of the income investor but there are signs that yield levels are also starting to come under pressure.

Source: InvestmentWeek

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