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Why this small-cap dividend deserves a closer look

Ben Hobson
·3-min read

Across the market, big name stocks pay out tens of billions in dividends each year, but investors often forget that it's just as possible to find good payouts in smaller-cap stocks like Jersey Electricity (LON:JEL).

At a time when economic uncertainty has led to questions over many dividend payouts, it's never been more important for income hunters to tread carefully in the search for reliable returns.

The good news is that some stocks look well placed to ride out this chaos. With a checklist of key dividend measures you can be on the path to finding them. Here's a summary of why Jersey Electricity's dividend scores well...

GET MORE DATA-DRIVEN INSIGHTS INTO LON:JEL »

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.

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.

  • Jersey Electricity has increased its dividend payout 9 times over the past 10 years - and the dividend per share is forecast to grow by 10.8% 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.

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 Jersey Electricity that you can find out about here.

Alternatively, if you'd like to find more dividend shares that might be worth investigating, you can find ideas on this Dividend screen.