Given the volatility in financial markets caused by Covid, it is becoming difficult to assess whether previous dividend forecasts are still useful. Dividend payouts however are a vital part of the return that investors get from owning stocks over time, and investors are not wrong to be looking out for stocks that can reliably pay a strong dividend, even in present market environments.
Beyond providing income, dividends are also a signal that a company is well-financed and well-managed. Today I'm going to use Worley (ASX:WOR) as an example of a company dividend that exhibits these safe characteristics.
Rules for finding reliable dividend payers
1. Dividend safety
Attractively high yields obviously turn heads - but it’s important to know that a dividend is affordable, especially in times where there is a need to save cash. 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.
Worley has dividend cover of 1.97.
2. High (but not excessive) dividend yield
Dividend yield is an important financial measure 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, and against its competitors.
High 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 pushes the yield higher. As a rule of thumb, a dividend yield of 10% or greater is a signal that a dividend may be too good to be true.
Worley has a dividend yield of 4.31%.
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.
Worley has increased its dividend payout 4 times over the past 10 years - and the dividend per share is forecast to grow by 38.5% in the coming year.
With these three important rules, you can track down shares that offer a reasonable yield, with a record of growth and safety. On this basis, Worley could be worth a closer look.
To find out more you might want to take a look at the Worley 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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