Your first impulse when you see an S&P/ASX 200 Index (ASX: XJO) share paying a 19% dividend yield with 80% franking credits may be to snap up some of the stock.
While that could work out handsomely for some ASX 200 dividend shares, proceed with care.
Those dividend yields you see posted are trailing. In other words, they’re derived from the past year’s payouts and based on the current share price.
The danger here is if a company’s share price takes a dive, its trailing dividend yield will rise sharply. And if the share price is falling hard, it’s often an indication that earnings and profits in the year ahead may not match those of the year gone by. Meaning any future dividend payouts could be significantly reduced. Or simply missing.
As Romano Sala Tenna, co-founder of Katana Asset Management, told us yesterday (full interview to be published next week):
I would caution inexperienced investors about taking on some of the yields that we’re seeing currently. Trailing yields count for nothing. That’s the first thing. You need to look at forecast yields.
Which brings us to the ASX 200 dividend share in question — fund manager Magellan Financial Group Ltd (ASX: MFG).
Magellan paid out an interim dividend of $1.10 on 8 March and a final dividend of 68.9 cents on 6 September. At the current share price, that works out to an 18.9% trailing yield.
But mind you, Magellan shares are also down sharply this year, along with its funds under management (FUM).
So, what’s an income investor to do?
Why this ASX 200 dividend share looks to be a trap
For some greater insight into that question, we defer to Wheelhouse Partners portfolio manager Alastair MacLeod and Dom Hamson, managing director of Plato Investment Management, courtesy of Livewire.
Macleod said it’s tempting “to think there’s an opportunity with this stock because it’s fallen so much. I mean, they’ve lost 50% of FUM”.
However, he said Magellan’s strongest assets are really its brand. As for FUM, he noted, “There’s still outflow.”
Macleod added, “You just don’t know what that base level of earnings is and therefore yield. So you just don’t need to be there.”
Hamson is also steering clear of this ASX 200 dividend share for now.
“It’s not worth the risk in our view,” he said.
According to Hamson:
We’ve been calling it a dividend trap all year because we know the fund’s management business, we’re a fund manager, and if your FUM’s going out the door very quickly, it’s very hard to turn that around.
He noted that Magellan’s growth style “is going to be tough … so as long as interest rates keep going up.”
Magellan may be a buy for its dividend yield in the future, but for now Hamson believes it’s too early.
“I think it’s going to be tough for them to turn that around. I’m sure they will eventually, but I think it’s too early to call it at the moment,” he said.
Magellan share price snapshot
The Magellan share price is down 3% today, bringing the ASX 200 dividend share’s losses to 50% in 2022. By comparison the ASX 200 is down 10% this calendar year.
