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Popular stocks when markets are volatile

Tina Morrison

If you’re looking for cash in these constrained economic times, you might want to hone in on companies which offer the best bang for your buck in dividends.

A dividend is an investor’s share of the profits a company makes and tends to be higher for lower-risk, mature businesses such as telcos, utilities and infrastructure which are cash cows but don’t have a lot of growth ahead of them. Examples are telecommunications company Spark or electricity company Meridian Energy.

High-growth technology companies such as cloud accounting software firm Xero don’t tend to pay dividends, preferring to reinvest their money to drive future growth. Investors wanting to see a return from these types of investments would need to sell their shares.

In Xero’s case, that would have worked out for investors who bought shares in the initial public offering at $1 each – the stock closed on the ASX on Thursday at A$77 (NZ$86).

However, share prices go up and down all the time and are often unpredictable. Dividends, by contrast, offer amore predictable return of cash which investors can spend.

It’s a trade-off between a regular high-dividend stream, or long-term growth which often leads to higher share prices.

Craigs Investment Partners investment director Mark Lister notes that in a volatile market and an uncertain environment, people are looking for income like reliable dividends.

Steady dividend-paying companies also tend to be lower-risk, more resilient during difficult times and better performers during recessionary periods, he says.

‘‘They are the safer ones,’’ Lister says. ‘‘At the moment, people are nervous, people are cautious, and people are looking for safety.’’

Analysts calculate the dividend yield, the estimated income return of a stock, by dividing a company’s annual dividend by its share price.

For example, if a company has a $20 share price and pays an annual dividend of $1, its dividend yield would be 5%.

Based on analyst forecasts for company dividends over the coming financial year and Thursday’s closing share prices on the NZX, Craigs estimates telco Chorus has a yield of 7.8%, Meridian Energy’s has a yield of 4.8% and real estate company Property for Industry has a yield of 4.7%.

Still, Lister warns that dividend yields are only one piece of the puzzle when evaluating whether a stock is a good buy.

Just as you wouldn’t buy a property investment based only on the rental yield it’s generating, you shouldn’t buy a share based on the dividend yield alone.

There may be some outliers with a high dividend yield because their share price is really low – that could mean the market has concerns about their future prospects which would mean the dividend wasn’t sustainable.

Lister says most investors have a mix of stocks in their portfolio with some safe, steady dividend payers that keep cash coming in the door as well as a few longer-term growth stocks.

‘‘At the moment, people are nervous, people are cautious.’’ Mark Lister

Craigs Investment Partners

Business

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2022-10-01T07:00:00.0000000Z

2022-10-01T07:00:00.0000000Z

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