The return 'boost' you get from cash dividends is a vital part of the total profits that can be had from investing in shares. In times of economic uncertainty, these payouts from shares like Paragon Banking (LON:PAG) are more important than ever.
With tens of billions paid out in dividends across the stock market each year, dividend income is an appealing source of returns. But the big challenge for investors is deciding which stocks offer the best balance of attractive payout and dividend sustainability. After all, the last thing you want is to suffer from a dividend cut.
To help you find the best dividends possible, there are a few key measures to remember. Let's take a look at the dividend paid by Paragon Banking as an example of what to look for...
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.
Paragon Banking has a dividend yield of 5.19%.
2. 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.
Paragon Banking has dividend cover of 2.39.
3. 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.
Paragon Banking has increased its dividend payout 8 times over the past 10 years - and the dividend per share is forecast to grow by 0.35% in the coming year.
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 Paragon Banking that you can find out about here.