The Economist wrote in the aftermath of the 2008 financial crash that the crisis had led to the largest number of dividend cuts and suspensions since the Great Depression of the 1930s.
Income investors were reminded of the fact that dividend payments are far from certain. This type of risk doesn’t go away. People just forget about it for a while. Then, before you know it, one of your “safe” companies has issued a profit warning and is cutting its dividend.
One of the quickest ways to kick the tires on your current dividend generators is to check the dividend cover (earnings per share divided by dividend per share). Dividend cover is the inverse of the dividend payout ratio. Dividend cover of two times or above is strong. Anything below one and a half times - as is the case for BP (LON:BP.) - should be stirring us to investigate in more detail.
Calculating BP's dividend cover ratio
A low level of dividend cover means that a small decline in earnings could consign your dividend payment to the scrap heap. It happens all the time. With that in mind, let’s take a look at BP's dividend cover.
We can get all the information we need to see if BP has an adequate level of dividend cover from the group’s StockReport. The group’s trailing twelve-month earnings per share is 24 cents and its trailing twelve-month dividend per share is 41 cents.
Divide the former by the latter and we get a trailing twelve-month dividend cover for Bp of 0.58. This is below the 1.5 times cover limit that marks the point at which we should do some further digging on dividend sustainability and safety.
Income investing: what you need to know
For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.
As for Bp (LON:BP.), you can find a wealth of financial data on the group's StockReport, including information on the group's past and forecast dividend payments. If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.