Here’s why I’m not convinced by this FTSE stock’s 9% yield!

This FTSE stock offers a mammoth dividend yield of 9%. Is it safe and viable for the long term? Our writer explains why she’s not convinced.

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FTSE 250 incumbent Ashmore (LSE: ASHM) has seen its dividend yield reach over 9%. I’m not convinced it’s sustainable. Here’s why.

Investing in emerging markets

Ashmore is an asset management business that focuses on investments in emerging markets. It offers these to institutional and retail investors. It invests in sovereign debt instruments, currencies, corporate debt, equities, derivatives, and more.

As I write, Ashmore shares are trading for 171p. Over a 12-month period, they’re down 10% from 191p at this time last year. That doesn’t seem too bad considering current market volatility caused by rising inflation and interest rates. However, the shares have dropped 40% from early February trading from 286p to current levels. This was when the volatility began to ravage markets, including all the FTSE indexes.

Why I’m skeptical about Ashmore’s dividend

When I see a high yield, I instantly think of a couple of things. Firstly, the share price has fallen off a cliff, pushing up the yield. Another scenario is where a business artificially inflates a dividend even if they don’t think it’s sustainable. This can help boost its appeal to investors. In Ashmore’s case, the former seems to be happening.

Let me break down the key reasons why I think there’s more to Ashmore’s dividend than meets the eye:

  • Ashmore’s financial record shows that the business is struggling somewhat. Looking at investor returns to start with, dividends have been relatively flat since 2018. City analysts reckon nothing is set to change, at least in the near term.
  • I tend to review indicators of performance for all FTSE stocks, such as earnings, revenue, and cash flow when reviewing a dividend’s sustainability. Ashmore’s indicators on all these fronts look disappointing. This could potentially lead to dividend cuts or even a cancellation altogether.
  • Ashmore’s Q1 update last week didn’t do anything to reverse my growing scepticism. It looks like trading has been tough of late. For the period ended 30 September, assets under management decreased by 8%. This was in part due to negative investment performance of $1.3bn and net outflows of $2.9bn.
  • After three consecutive quarters of positive returns, Ashmore said in its update that this quarter has delivered negative returns.

I am aware that investing in emerging markets is prone to more volatility. After all, these aren’t as established as better-known markets with more information readily available for due diligence.

A FTSE stock I’m avoiding… for now

Right now, I’m not planning on adding Ashmore shares to my holdings. I’m not convinced it can sustain its high yield. That doesn’t mean it won’t pay a dividend at all. I just think the business has been on a bit of a bad run when you dig a bit deeper. When this happens, one of the first actions a business takes is to cut or cancel a dividend to conserve cash. There aren’t any concrete signs of this happening just yet but I’ll watch with interest.

I believe there are better FTSE stocks out there with lower but more reliable yields that could boost my passive income stream.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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