When researching dividend-paying stocks, it’s important to look beyond the company’s dividend yield.
It’s essential to get a good feel for the sustainability and growth rates of the dividend, as this should help reduce the chance of facing a dividend cut in future. With that in mind, here’s three important things to look for:
There’s a reason revenue is often referred to as the ‘top-line’ – it sits at the top of a company’s income statement and therefore influences everything below it.
When revenue is increasing, it’s much easier for a company to increase its profits, and this means the dividend should be supported.
In contrast, if revenue is declining, profit growth can be harder to come by, and this could increase the chances of a dividend cut. Therefore, dividend investors should always examine a company’s revenue growth, looking at trends over the last three to five years, and also examining analysts’ forecasts for future revenue growth.
While dividends can help you build your wealth, growing dividends can really power your portfolio higher. There’s two main reasons for this. First, a growing dividend obviously gives you more compounding power. Second, as a company grows its dividend over time, the rising dividend payout should put upwards pressure on the company’s share price, as investors are prepared to pay more for the increased dividend payout.
Therefore, it’s essential to check a company’s dividend growth rate.
Ideally, look for recent growth of 5-10% a year or more. And check analysts’ forecasts for estimates of future growth, as its important that the dividend keeps growing going forward.
The dividend coverage ratio is an important ratio that dividend investors use to assess the sustainability of a company’s dividend. It’s a common sense ratio that is calculated by dividing a company’s earnings per share by its dividend per share.
The higher the ratio, the better, as high dividend coverage ratios (over 2.0) signal that the company can comfortably afford to pay out the current dividend. A low ratio (under 1.5) signals that there’s not a lot of margin for error if profitability was to fall. And a ratio of under 1.0 generally signals that the dividend payout is unsustainable.
Of course, these are just three things to look for when assessing dividend-paying stocks. There are many other factors that can and should be examined, and it’s important to always research a company thoroughly before investing.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.