Some more questions to help you avoid yield traps

Last month I outlined six questions designed to help investors avoid potential yield traps. This month I’ll cover four more.

These four questions, plus the six from last month, look for a variety of warning signs including:

  • bad management
  • high costs
  • dangerously large or risky projects
  • excessive acquisitions
  • highly cyclical markets and
  • markets that are likely to decline over the next decade or more

Although it can be difficult to define exactly what bad management is, for example, investigating these issues and drawing conclusions is still a very worthwhile activity.

That’s because it can help you build up a nicely rounded picture of a company, far beyond what you’ll get from just looking at financial statements.

You can read the full article below, along with the rest of the April issue of Master Investor magazine where it was originally published:

Yield trap cover 2017 04
Click to read (PDF)

How to avoid yield traps – Part 2

Note: I should tip my hat towards Stuart Slatter and David Lovett, who wrote Corporate Turnaround, an excellent book from which I borrowed most of these ideas.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

7 thoughts on “Some more questions to help you avoid yield traps”

  1. Ciao John,

    Loved this article, well written and down to the point. Made me think a lot, especially the last part where you speak about declining markets… Food for thoughts…

    Ciao ciao

  2. What about stocks subject to regulatory risks? A while ago you wrote a piece about how IGG looked like a good bet and right after it declined 25% or so on the news that the Government was clamping down on spread betting. A similar thing happened to SSE and Centrica in 2013, although SSE since recovered.

    1. Hi Andrew, that’s a good point. I don’t specifically look at regulatory risk because it isn’t a common cause of decline, but for highly regulated industries, especially finance and energy at the moment, it is important.

      I would say that regulatory risk is something that’s on my radar, but not something I look at to any great extent because it’s so unpredictable. Also, the impacts are often hard to discern even when the change has been announced.

      For example, the three companies you cite have been negatively impacted by regulatory changes in recent years, but exactly how that will affect them over the longer-term is as yet unknown. All three are still in the UKVI model portfolio and my personal portfolio as well because I see no obvious reason to sell them, at least for now.

      1. John. I can’t say I’m pleased that we both share the holding of Centrica. Fortunately I escaped SSE at a sensibly higher price than paid. Perhaps Centrica has a recovery at some point, it’s very hard to read and incredibly hard to value Centrica or SSE. Nonetheless I consider both a mistake on my own part, with a painful 25% drop in the case of Centrica..

        I G Group however, at current prices could end up being a very good investment and I started buying at below 500p and will hold as just under 1% of my portfolio for the longer term.


      2. Hi LR, I hate to be optimistic about specific companies but I must say I’m probably a bit more optimistic than you about Centrica and SSE. As always though, only time will tell if that (relative) optimism is misplaced or not.

Comments are closed.

%d bloggers like this: