Avoiding the dividend traps

Dr Don Hamson, Managing Director of Plato Investment Management, says one of the keys to successful income investing is to avoid the ‘dividend traps’. Not only can the traps reduce income but they often result in material loss of capital as the price of the security also falls. Hamson says some of the red flags he looks at are 1) Steadily falling share prices, which artificially inflate the yield 2) Companies where the underlying business is facing structural and competitive challenges which may place future earnings under pressure. In addition, Hamson says a well constructed income portfolio should also include companies that might not be ‘high yield’ today but have the capacity to grow their dividends in the future. In this video Hamson discusses dividend traps in the context of grocery retailers and highlights one sector that he believes is often overlook as a source of income.