Dividend payouts are a vital part of the return that investors get from owning stocks over time. Given the volatility in financial markets caused by Covid however, it is becoming difficult to assess whether dividend forecasts are still useful. Could companies with even the most impressive track records for paying them cancel them in an effort to preserve cash?
For Wpp (LON:WPP), the data suggests that the dividend is safe for now. Below I'll go through three measures which show that the dividend exhibits safe characteristics.
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.
- Wpp has dividend cover of 2.50.
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.
- Wpp has a dividend yield of 3.87%.
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.
- Wpp has increased its dividend payout 7 times over the past 10 years - and the dividend per share is forecast to grow by 8.51% in the coming year.
With these important rules, you can track down shares that offer a reasonable yield, with a record of growth and safety. On this basis, Wpp could be worth a closer look.
To find out more you might want to take a look at the Wpp StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.
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