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With dividend cuts increasingly common over the past two years, it has never been more important for income investors to tread carefully...
Deceptively high yields have turned into traps and the promise of payout growth has vaporised in many cases. The good news is that some stocks are well placed to withstand these problems - but is Alumasc (LON:ALU) one of them?
For investors wondering how to react to economic and geopolitical uncertainty, it's worth remembering that dividends remain a vital component in the overall return from shares. With the right tools, it's possible to find stocks that are better placed to ride out this chaos.
With that in mind, here's a checklist of key dividend measures that can put you on the path to finding them - plus a summary of why the dividend paid by Alumasc scores well...
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.
Alumasc has a dividend yield of 5.60%.
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.
Alumasc has increased its dividend payout 7 times over the past 10 years - and the dividend per share is forecast to grow by 5.26% 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.
Alumasc has dividend cover of 2.41.
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 Alumasc that you can find out about here.