Are your dividends safe?

High-yielding stocks don't necessarily make good investments. Matthew Partridge explains why, and how you can spot the duds.

Dividends are a key component of a stock's return. If you had put £100 into the FTSE ten years ago, you would have made less than £14 solely from the change in prices. However, if you had reinvested the dividends, you would have seen your original investment grow to more than £170. What's more, successive studies have shown that high-yielding stocks tend to be better investments. Indices composed of these stocks have usually (but not always) beaten the main indices. For example, the MSCI Europe High Dividend Yield index has outperformed the MSCI Europe index since 1999.

However, just because high-yielding stocks perform better on average doesn't mean that they are always a good investment. The mining and energy sectors have become a favourite destination for investors looking for income stocks over the past decade. But lately their share prices have crashed, as the Chinese slowdown and the plunging price of crude and base metals have slashed profits. Worse, the sudden reduction in income has also meant that many are cutting their dividends as they scramble to cover costs. Last month, Glencore scrapped its dividend completely as part of a plan to reduce the level of debt on its books.

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Dr Matthew Partridge
Shares editor, MoneyWeek

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri