Consider BT, HSBC, Royal Dutch Shell, or Vodafone. For many investors they are reliable stocks, providing a backbone to an investment portfolio. After all, they are low risk and provide good income. Then again, consider their share price performance.
BT shares have fallen 30% over the last year, while today’s share price is barely more than a third of the price five years ago. Sure yield is handsome — almost 10%, but such an appalling share price performance is enough to shake any investor’s confidence.
Or take HSBC, whose yield on the shares is close to 7%. While the share price has performed better than BT’s it is still 15% down over the last year, and flat over the last five.
Then there’s Royal Dutch Shell, whose shares have fallen by a fifth over one year, and are flat over five. Its dividend yield on the other hand is north of 7%.
Finally, there is Vodafone, with dividends at 5%. This company has actually seen shares rise over the last year, but the share price today is less than a half of the price five years ago.
Is it worth it for the dividends?
As long as these companies are forking out in excess of 5% a year, some shares in the companies might be worth hanging onto, especially if your main motivation for investing is income.
On the other hand, consider how dividends as a percentage of your investment can fall over time. Take BT as an example. The dividend may be somewhere off in the stratosphere, but an investor who bought into the company five years ago would now be receiving a yield that is the equivalent of 3% of the original investment.
Royal Dutch Shell has a fundamental problem. Its core product is the very thing that is vexing those who worry about climate change. It will gradually reduce reliance on oil, but you could balance your risk by also investing in good dividend paying stocks or funds that offer exposure to renewables.
Consider alternatives
Drax Group (LSE:DRX), for example, with a dividend yield at 5.25%, is now working on carbon capture technology. Or there is the new Octopus Renewables Infrastructure Trust, which is targeting a 3% dividend yield in year one and 5% in year two.
As a complement to HSBC, Lloyds Bank (LSE:LLOY) pays out a dividend of 5.5%, but now that the PPI disaster finally seems to be receding into its past, the company is turning heads with its digital strategy.
Or, if you like the idea of gaining exposure to 5G, but are not comfortable with the share price performance of either BT or Vodafone, consider a company like Aveva Group (LSE:AVV) — it’s dividend yield is a modest 1.3%, but shares have trebled over three years.
Diversification is an important part of investing. I am not saying that if you are an income investor you should eliminate BT, HSBC, Vodafone, and Royal Dutch Shell from your portfolio altogether. But I do suggest you consider spicing it up with exposure to other dividend payers that might also offer growth, too.
