Regular dividend payments make up a large portion of the total return you get from stocks over time. But with so many ways to assess dividends — and so many potential pitfalls — it’s important to focus on the most actionable measures.
With economic conditions more uncertain than usual, dividends are highly desirable. But it’s also true that these payouts are the first thing that gets lowered as companies face an unpredictable future.
To help you find the best possible dividends, there are a few important measures to remember. Let’s take a look at Tokyo Electron Device (TYO:2760) as an example of how this works.
1. High (but not excessive) dividend yield
Yield is an important dividend metric because it tells you the percentage of how much a company pays out in dividends each year relative to its stock price. That makes it easy to compare dividend payouts across the market.
High yields are of course attractive, but beware of excessive yields (usually over 10%) as they can be a sign of trouble. When the market suspects that a company can’t keep up with its dividend, the stock price will fall and even push yields up — and this can be a trap. So it pays to be wary of excessive returns.
2. Dividend Growth
Another key marker for income investors is a track record of dividend growth – and evidence that growth will continue. Consistent dividend growth can be an indication of companies that carefully manage their payout policies – and reward their shareholders over time. Rather than aggressively dishing out profits, companies with dividend growth tend to have more modest returns but are better at sticking to their payouts.
3. Dividend Safety
Attractively high yields naturally draw attention – but it’s important to know that a dividend is affordable. Dividend coverage (similar to payout ratio) is a go-to measure of a company’s net income on the dividend paid to shareholders. It is calculated as earnings per share divided by the dividend per share and helps indicate how sustainable a dividend is.
Dividend coverage of less than 1x suggests the company cannot fund the payout from the current year’s earnings — and may be dependent on other funds to pay it.
What does this mean for potential investors?
Yield, growth and safety are the three main pillars that underpin some of the most popular dividend investing strategies. But it’s important to know that dividend payments can be cut or canceled very quickly when the outlook changes.
To better understand the dividend outlook for stocks, it’s important to do some research yourself. We have indeed identified points of interest with: Tokyo Electron Device you can learn more about here†