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Unpredictable economic conditions have cast a spotlight on the importance of dividends from stocks like Bodycote (LON:BOY).
With so much uncertainty around the sustainability of some dividends, it's natural that investors are searching for the best payouts available. With tens of billions paid out by stocks every year, dividend income is in high demand, but knowing where to find it is getting harder.
Part of the problem is that shares on attractive high yields are turning out to be a mirage in many cases. Dividend cuts have swept through the market. The pain for investors is real. So what should you be looking for in the search for sustainable dividend income?
Here's a checklist of measures and a summary of why Bodycote's dividend scores well against them...
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 share price. That makes it easy to compare dividend payouts right across the market.
High yields are obviously appealing but be careful of excessively high yields (usually above 10%) because they can be a sign of problems. When the market suspects a company may be unable to sustain its dividend, the share price will fall and actually push the yield higher - and this can be a trap. So it pays to be wary of excessive yields.
Bodycote has a dividend yield of 3.59%.
2. Dividend growth
Another important marker for income investors is a track record of dividend growth - and 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.
Bodycote has increased its dividend payout 9 times over the past 10 years - and the dividend per share is forecast to grow by 5.19% in the coming year.
3. Dividend safety
Attractively high yields obviously turn heads - but it’s important to know that a dividend is affordable. Dividend Cover (similar to the payout ratio) is 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.
Dividend cover of less than 1x suggests 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.
Bodycote has dividend cover of 1.82.
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 Bodycote that you can find out about here.