I think it’s only natural to gravitate to high-yielding dividend stocks when searching for passive income. Some of these companies distribute far more than a diligent saver would earn from just sticking their cash in a bank account.
The snag is that one needs to be even more picky than usual. A bumper dividend yield becomes redundant if the share price just keeps falling.
Poor performer
One example of the above is specialist emerging markets investment manager Ashmore Group (LSE: ASHM).
Right now, shares in the FTSE 250-listed company yield a staggering 10.1%. For perspective, the highest-paying easy-access Cash ISA account in the UK will cough up just over 5%.
One major reason for this is that Ashmore’s stock simply won’t stop falling. It’s down 25% in the last year and over 70% since February, 2019. When a share price falls, the yield is pushed up (all other things being equal).
The issues aren’t hard to fathom. Assets under management have fallen dramatically as a result of clients withdrawing their cash in the wake of concerns about geopolitical tensions and volatility in emerging markets. And who can blame them when the US stock market is going gangbusters?
Things are so bad that Ashmore’s dividends aren’t even expected to be covered by profit.
Where’s the growth?
But there’s another thing to note. A great company for income hunters doesn’t just return a good dollop of money to its shareholders at regular intervals. It’s also one that grows the payout over time. Worryingly, Ashmore hasn’t hiked its total dividend at all since 2020.
Of course, interest in other, less developed markets could rise in response to concerns that US stocks are too expensive. Since some of these nations are forecast to grow rapidly in the decades ahead, long-long term investors in particular may want to consider some exposure.
Even so, they may wish to contemplate less risky ways of going about it.
A better option to consider?
In sharp contrast to Ashmore, stock in FTSE 100 giant Imperial Brands (LSE: IMB) has been absolutely flying in the last year (+52%). And there’s been a lovely dividend stream on top!
Imperial’s rise is partly down to signs it’s becoming less dependent on traditional tobacco sales. Adjusted operating profit growth of 4.6% was hit in the last financial year. This was helped by a 26% jump in revenues for next-generation products (NGPs) such as vapes and nicotine pouches. This comfortably beat analyst forecasts.
More recently, President Trump’s recent move to withdraw a plan to ban menthol cigarettes — hugely popular in the US — has been another tailwind.
Solid dividend yield
The yield here is ‘just’ 5.7%. However, that’s still greater than the aforementioned best savings account.
Imperial also boasts a good record of raising its payouts too. That record isn’t perfect, though. The dividend was cut by a third in 2020 as the pandemic raged, underlining the point that income can never be guaranteed.
One potential concern here is if regulators begin taking a greater interest in NGPs as the years pass and more data on how they impact health emerges.
For this reason, anyone thinking of buying the stock may wish to double-check that their portfolio is already sufficiently diversified.
