Dividend Hunting - The Perils Of Blindly Chasing The Yield

All too often, we can hear people talking about established and great companies providing high dividend yields. In the low interest rate environment, investors then chase those yields and fail to consider the potential risks. In this report, I am going to digress from my usual approach in valuing a single company. Instead, I will take a group of established companies, based on certain criteria, and show why dividend hunting - even with exceptional companies - has risks easily identified but largely ignored.
The Criteria
Before I dip into the selection criteria I used to screen stocks, I would like to stress out that there is a stark difference between valuing a company (using fundamental drivers of stock value) and pricing it (such as using price multiples). Since I will focus on what impacted price appreciation for the selected group of stocks during the last five years, value drivers (such as free cash flow) will not be considered.
To begin, stock investing - even for seekers of income in the form of dividends - must be considered on total return perspective; that is, dividend and capital gains (It is not a revolutionary new concept but even with this knowledge many investors fail to properly consider their investment decisions). Capital gains, in turn, can be decomposed into earnings growth, the percentage change in the P/E ratio, and the interaction term between the two:
Formula 1
To see it all in numbers, I ran a stock screener on consumer goods sector (for it... Read more