Zim Integrated Shipping Services: Here’s why high dividend yields can be misleading
Common misconception: 111% dividend yield? So you’re telling me, in a year, I’ll get my money back just from dividends? Technically correct. But also not.
It’s tempting, but here’s why it’s not 100% reliable.
Let’s rewind. What is a dividend yield? It’s the annual cash return (dividends) on your investment.
- Dividend yield = dividend payment over last 12 months / stock price
- Example: Walmart has a dividend yield of 1.48% ($2.24 dividends paid in the past year divided by the current share price of $151.69)
Back to Zim.
Zim provides container shipping and related services — a highly cyclical business that does well during a strong economy.
- The more consumers buy, the more businesses ship, and the better Zim does.
- During COVID, Zim benefited from skyrocketing shipping rates and strong demand.
They made so much money they declared a $17 dividend per share at the start of 2022. Partly explains why their yield is so high.
Excluding this dividend, Zim has paid out an average $3 dividend per quarter since it went public in 2021. That’s still a ridiculous 50% dividend yield.
BUT: If $ZIM hadn’t fallen 70% from its peak, that would have been a ~14% yield.
Investors have two main concerns:
- Will Zim cut their dividend during a recession?
- How will a recession impact the company’s stock price?
A 50% dividend payment looks a lot less attractive if the stock falls another 50%.
General rule: High dividend yields (general rule: >10%) warrant caution. This is often a sign of trouble at the company or with the industry. With Zim, it’s looking like problems in the industry.