The return âboostâ you get from cash dividends is a vital part of the total profits that can be made by investing in stocks. In times of market volatility, such share payments as Dios Fastigheter Ab (STO: DIOS) are more important than ever.
With tens of billions of dollars paid out in dividends in the stock market each year, dividend income is an attractive source of returns. But the big challenge for investors is deciding which stocks offer the best balance between attractive payout and sustainability of dividends. After all, the last thing you want is to suffer from a dividend cut.
To help you find the best possible dividends, there are a few key metrics to remember. Let’s take a look at the dividend paid by Dios Fastigheter Ab as an example of what to look for …
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1. High dividend yield (but not excessive)
Yield is an important dividend indicator because it tells you the percentage of how much a company pays out in dividends each year relative to its stock price. This makes it easier to compare dividend payments across the market.
High returns are obviously attractive, but beware of excessively high returns (usually over 10%) as they can be a sign of trouble. When the market suspects that a company might be unable to maintain its dividend, the stock price will fall and push the yield up – and that can be a trap. It is therefore better to be wary of excessive returns.
2. Dividend security
Attractive, high returns obviously turn heads – but it’s important to know that a dividend is affordable. Dividend coverage (similar to payout ratio) is an essential measure of a company’s net income relative to the dividend paid to shareholders. It is calculated as the earnings per share divided by the dividend per share and helps indicate how sustainable a dividend is.
A dividend coverage of less than 1x suggests that the company cannot fund the payment from its current year profits – and could rely on other sources of funds to pay it.
3. Dividend growth
Another important marker for income investors is a history of dividend growth – and evidence that growth will continue. Consistent dividend growth can indicate companies carefully managing their payment policies and rewarding their shareholders over time. Rather than aggressively distributing earnings, dividend growth companies tend to have more modest returns, but are more adept at sustaining their payouts.
Dios Fastigheter Ab increased his dividend payment 5 times in the last 10 years – and the dividend per share is is expected to grow by 3.79% 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 reduced or canceled very quickly when the outlook changes.
To better understand the dividend outlook for any stock, it’s important to do some research yourself. Indeed, we have identified areas of concern with Dios Fastigheter Ab which you can find out here.
Alternatively, if you want to find more dividend stocks that might be worth investigating, you can find some ideas on this dividend screen.