Over one fifth of income from shares has been described as a “dividend trap” because the yields on the shares appear unrealistic.
In some cases yields are twice that of comparable companies, according to research from Henderson International Income Trust (Hint), and companies that could pose a dividend trap pay out £230 billion (€260.3 billion) of global dividends – a fifth of last year’s total.
Dividend traps are shares with yields that are “too good to be true” compared to similar companies or the wider market. Overall, dividend traps identified by Hint yield 5.7% – more than double the global average.
Telecoms and oil companies were most likely to be dividend traps, while tech and pharma companies were least likely to be, according to research by the trust.
“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,” said Ben Lofthouse, fund manager of Hint.
Dividend growth protects investors from inflation and drives share prices higher over the long term, meaning investors can benefit from capital gains as well as dividends, said Lofthouse.
But he added: “You might be pleased for a short while as the dividends roll in, but that satisfaction could quickly turn to disappointment if you’ve bought a dividend trap and find your capital being eroded, your income being cut, or the share price simply trading sideways indefinitely.”
Dividends from European companies grew at their slowest rate for ten years in the first quarter of the year, yet at the global level dividends set a new record.
The trust researched 1,200 companies included in the Janus Henderson Global Index. Collectively these companies represent around 85% of global dividends by value. The researches scaled up the findings in order to account for global dividends not paid by the top 1,200 stocks.
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