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Dividend payouts are a vital part of the return that investors get from owning stocks over time. But with the economic pressures caused by Covid, it has become difficult to assess whether dividend forecasts are still useful. Could companies with even the most impressive track records cancel their payouts in order to preserve cash?
Let’s take a look at Royal Mail (LON:RMG) and some of the most important dividend data-points to look out for…
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What makes a reliable dividend payer
1. Dividend safety
It’s important to know that a dividend is affordable, especially in times where there is a need to save cash. For this, you can use Dividend Cover – a go-to measure of a company’s net income over the dividend paid to shareholders. It’s calculated as earnings per share divided by the dividend per share and helps to indicate how sustainable a dividend is.
Companies with a dividend cover of less than 1x suggest that the company can’t fund the payout from its current year earnings – and might be relying on other sources of funds to pay it. In present times, it must be asked how easy it is going to be to raise capital in order to simply pay a dividend.
2. High (but not excessive) dividend yield
High dividend yields are obviously appealing – but be careful of excessively high yields because they can be a sign of underlying problems. When the market suspects a company may be unable to sustain its dividend, the share price will fall, which in turn pushes the yield higher. A dividend yield of 10% or greater is a signal that a dividend may be too good to be true.
3. Dividend growth
Another important marker in assessing the reliability of a dividend is a track record of dividend growth – which can usually be used as evidence that the growth will continue. Consistent dividend growth can be a pointer to companies that are carefully managing their payout policies – and rewarding their shareholders over time. Rather than aggressively dishing out earnings, dividend growth companies tend to have more modest yields, but are better at sustaining their payouts.
- Royal Mail has increased its dividend payout 6 times over the past 10 years – and the dividend per share is forecast to grow by 117.8% in the coming year.
What does this mean for potential investors?
Yield, Growth and Safety are the three main pillars that support some of the most popular dividend investing strategies. But it’s important to know that dividend payouts can be cut or cancelled very quickly when the outlook changes.
To get a fuller understanding of the dividend prospects for any stock, it’s important to do some investigation yourself. Indeed, we’ve identified areas of concern with Royal Mail that you can find out about here.
Alternatively, if you’d like to find more dividend shares that might be worth investigating, you can find ideas on this Dividend screen.
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