Investors should spend more time looking at the underlying health of a company rather than chasing high-yielding stock, according to Tyndall Asset Management (Tyndall AM).
While dividend yields are predicted to be a major characteristic of 2013, the asset management company has warned that blindly chasing good returns can lead investors into a trap.
"When determining whether a stock is good value or just a trap, investors need to assess the underlying health of the company and the sector it operates in," Tyndall AM head of Australian equities Bob Van Munster said.
"The dividend yield is a function of the stock's dividend and its price, and a high dividend yield could simply indicate that the stock is cheap - and cheap for a reason. For instance, deteriorating businesses can often have a high dividend yield that proves to be an illusion."
Tyndall Am recommends investors look beyond headline dividend yield and instead focus on sustainable yields, earnings growth and capital appreciation.
Some sectors with high-yielding companies may be facing structural challenges which can affect investor returns.
"The strength of a company's balance sheet (particularly gearing levels), as well as franking levels, pay-out ratios, potential for share buy-backs and special dividends, are all keys to assessing the sustainability of a company's dividend," Mr Van Munster said.
"Therefore, picking the highest yielding stocks without conducting thorough due diligence can lead to substantial underperformance."
