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Getting under the skin of high dividends

Should these companies maintain their distributions to shareholders?
Getting under the skin of high dividends
  • Why special dividends can be a zero-sum game for investors
  • Remember that high yields often exist to compensate high risk

The stocks we examine this week have each paid in the last year what appear unsustainable dividends that aren’t supported by earnings. High dividends (and high yields) arise for a range of different reasons:  simple over-distribution, returning excessive capital or from unsustainable surges in key market segments. In two cases, much of the dividend was a special payment (typically a zero-sum game for investors) driven by step change which means they do not form core, reliable income. In the third case, the high yield reflects high risk.

Dunelm (DNLM)  The UK homewares retailer is bucking an otherwise weak retail trend with sales more than 20 per cent above pre-Covid levels. This is driven by market share gains (partly self-help and partly drop outs from the likes of Debenhams) and a very sharp increase in online sales. Dunelm is in focus here because it is paying out large dividends uncovered by earnings. This is not a reckless policy, but rather a removal of excess capital through special dividends which appear, for now,  capable of continuing. Sadly, as special dividends are a zero-sum game for investors, perhaps Dunelm should consider buy-backs instead. 

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