When the going gets tough, dividends get cut. Given today's volatile market conditions, mature economic cycle, and historically high dividend yields that are often inadequately covered by earnings, it pays to be diligent.
One of the quickest ways to kick the tyres on your current dividend generators is to look at 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, but anything below one and a half times - as is the case for Lloyds Banking (LON:LLOY) - should be stirring us to investigate in more detail.
What is Lloyds Banking’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. When that happens, it is usually accompanied by a drop in share price value. With that in mind, let’s take a look at Lloyds Banking's dividend cover.
We can get all the information we need to see if Lloyds Banking has an adequate level of dividend cover from the group’s StockReport. The group’s trailing twelve month (TTM) earnings per share were 3.45p and its TTM dividend per share was 3.4.
Divide the former by the latter and we get a trailing twelve-month dividend cover for Lloyds Banking of 1.02. 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 Lloyds Banking (LON:LLOY), 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.