A fifth of all dividend paying shares are “traps”

Record global dividend levels mask growing risk of exposure to unsustainable dividend trap companies.

Dividend payouts have recently been reaching reach new record highs. In 2018 global dividends rose to a record $1.37 trillion in headline terms, representing a 9.3% increase, according to the latest Janus Henderson Global Dividend Index.

However, those top-line growth figures may be hiding a number of dividend payers increasingly at risk of a payout cut. Up a fifth of shares may be so-called “traps,” Henderson International Income Trust has warned in a new analysis.

Defining dividend traps as shares with a yield on average double the overall global dividend yield, Henderson found that 19% of all companies can be described as traps.

On that basis, half of the world’s highest-yielding shares are traps while 22% of payouts globally are from companies with vulnerable dividends.

In total, £230 billion of the world’s dividend income could pose a potential dividend trap for investors in those businesses.

Key indicators of a dividend trap include low dividend cover, high indebtedness and slow cash-flow growth.

According to Ben Lofthouse, fund manager of Henderson International Income Trust, at a time when interest rates are historically low, dividend payouts have been a lifeline for people looking to generate regular income from their investments.

The high number of shares deemed a potential dividend trap poses a risk to such investors.

Lofthouse says: “If you get caught in a dividend trap, you may find the income you hoped for is cut or has no prospect of sustainable growth. This eliminates one of the main advantages of investing in equities, which is for dividends to grow over time.

“Dividend growth not only protects investors from inflation, but crucially it also drives share prices higher over the long term, meaning investors can benefit from capital gains too.”

Money Observer runs a regular Dividend Danger Zone feature, screening and profiling shares listed in the UK at risk of a dividend cut.

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