Dividend Yield Pitfalls, Is High Dividend Always Good?

TL;DR

• Dividend yield is the ratio of dividends to share price, but it does not tell the whole story.
• High dividend yields may hide issues such as financial weakness, one-off special dividends, or signals from price declines.

What is dividend yield

Dividend yield is typically calculated as annual dividends per share (recent or expected) divided by the share price. For example, if annual dividends are 1,000 KRW per share and the share price is 10,000 KRW, the yield is 10%. Dividend yield is a straightforward indicator of cash return and is a common starting point for income-focused investors.

Why it matters

Dividends form part of total equity returns and can provide steady cash flow. They matter for long-term investors and those relying on dividends for living expenses. However, dividend yield should be assessed alongside a companys ability to pay, growth prospects, and tax considerations. For up-to-date rules and tax rates, consult brokerage firms or the National Tax Service.

Common pitfalls of high dividends

1) One-off special dividend: A high yield may result from a special dividend and may not repeat next year.
2) Result of price decline: A spike in yield after a sharp price drop can reflect fundamental problems.
3) Reduced reinvestment capacity: High dividends can limit funds for future growth investments, weighing on long-term value.
4) Sustainability of dividends: Extremely high payout ratios relative to earnings may be unsustainable.

Example calculations (hypothetical numbers)

Case A: Normal dividend

• Share price: 10,000 KRW
• Annual dividend: 800 KRW

Dividend yield = 800 / 10,000 = 8.0%

Case B: Includes one-off special dividend

• Share price: 10,000 KRW
• Regular dividend: 500 KRW, Special dividend: 1,500 KRW (one-time)
• Total dividend this year: 2,000 KRW

Short-term yield = 2,000 / 10,000 = 20.0%
Without the special factor next year, the sustainable yield is 500 / 10,000 = 5.0%.

Case C: High yield from price decline

• Previous price: 20,000 KRW, Annual dividend: 1,000 KRW (yield 5%)
• After price drop: 5,000 KRW, same dividend gives yield 20%

If the price decline stems from weaker profitability, dividend cuts become likely.

Conclusion and checklist

Dividend yield is a useful starting point, but it is risky to rely on it alone. Check dividend sustainability (earnings, cash flow), payout ratio, one-off factors, and the companys need for growth investment. Consider adding dividend-related items to your stock analysis if needed. My Stock Radar

This article is for informational purposes and is not investment advice.