The Globe and Mail and The Financial Post both reported on an analyst recommendation that a high-yield doesn’t automatically mean a stock’s inclusion in an income-oriented portfolio. George Vasic of UBS Securities calculates a security’s “true yield” by adding the annualized net share shrinkage to the actual dividend yield. He notes that TransAlta (TSX: TA) yields 4.6%, but its “true yield” is only 0.2%. Quebecor World (TSX: IQW.sv), on the other hand, sports a yield of 2.8%, whereas its “true yield” is 5.3%.
Savvy investors already recognize the power of growing dividends, the positive effects of share buybacks and are wary of high-dividends as an indicator of potential risks. Also, as the column notes, shares outstanding can grow significantly in the wake of a major acquisition, while any earnings synergies are likely to be realized much later. Like any metric, “true yield” should be used judiciously.
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