SMSFs chasing income and imputation credits through high-yielding equities on the Australian Securities Exchange need to be mindful of being caught in a dividend trap and being exposed to concentration risk within their portfolios, according to the head of a boutique local fund manager.
“One of the traps of high-yield investing is going for the highest-yield stock and what we call a dividend trap,” Plato Investment Management managing director Don Hamson said at the S&P Dow Jones franking credits seminar in Sydney last week.
“They’re [high-yield stocks] priced on the value of a 15 per cent yield and that probably tells you the market thinks they’re not going to come out and cut it.”
Hamson said SMSF investors needed to look at that type of valuation to avoid investing in high-yielding equities that end up not declaring any dividends – a situation he had seen materialise with some exchange-traded funds (ETF).
“What we’ve seen, and even looking at some of those high-yielding ETFs, is that they’ve got a pretty good track record to pick out a few stocks that trade on a high yield and then come out and say ‘sorry boys, we’re not going to pay a dividend this year’,” he said.
He warned the chase for income through high-yielding shares could also lead to lack of diversity within SMSF portfolios.
“One of the issues investors have to think about in self-managed super is in trying to have a great [yield] ride over the last three years is to have a portfolio of the four banks and Telstra that is not particularly well diversified,” he said.
“It is a real problem for investors if we have a banking crisis, seeing the numbers suggest they’ve [SMSFs] got very large weightings in the big four banks and Telstra.”
