Dividend payouts are a vital part of the return that investors get from owning stocks over time. Whether you're after large-cap cash cows or small-cap growth stocks, dividends can be a pointer to well financed, well managed companies - and Legal & General (LON:LGEN) is just one example.
Given the volatile market conditions this year, dividends are more important than ever. History shows that solid, high yielding stocks are a reliable source of investment profits in good times and bad. But how do you find them?
There are several ways of finding attractive dividend stocks, but it's worth keeping in mind a few key rules. Let’s look at the Legal & General dividend as an example of what to look for.
Rules for finding dividend shares
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.
- Legal & General is an adventurous, large cap in the Investment Banking & Investment Services industry and has a market cap of £11,514m. It has a dividend yield of 9.22%.
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.
- Legal & General has increased its dividend payout 9 times over the past 10 years - and the dividend per share is forecast to grow by 4.30% 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.
- Legal & General has dividend cover of 1.77.
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, Legal & General could be worth a closer look.
To find out more you might want to take a look at the Legal & General 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.
To find more stocks like Legal & General, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Dividend Stock Ideas - which gives you everything you need. So why not come and take a look?
Plus, if you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.