Dividend payouts are an essential part of the return investors get from owning stocks over time. Whether you’re looking for large-cap cash cows or small-cap growth stocks, dividends can be an indicator of well-funded and well-managed companies – but is that the case with Cimic (ASX: CIM)?
In times of economic uncertainty, knowing how to spot sustainable dividends is essential. History shows that strong, high-yielding stocks are a reliable source of investment profits in good times and bad. But how do you find them?
There are many ways to find attractive dividend stocks, but there are a few key rules to keep in mind. let’s look at it Civic dividend as an example of what to look for.
Dividend Stock Search Rules
1. High (but not excessive) dividend yield
Yield is an important dividend metric because it tells you the percentage of the amount a company pays out in dividends each year relative to its stock price. This makes it easier to compare dividend payouts across the market.
High returns are obviously attractive, but watch out for returns that are too high (usually above 10%) as they can signal trouble. When the market suspects that a company is unable to sustain its dividend, the stock price drops and actually pushes the yield up – and that can be a trap. It is therefore better to be wary of excessive returns.
- Cimic has a dividend yield of 5.12%.
2. Dividend Growth
Another important marker for income-oriented investors is a history of dividend growth – and proof that growth will continue. Steady dividend growth may indicate that companies are carefully managing their distribution policies and rewarding their shareholders over time. Rather than aggressively spreading their earnings, dividend-growing companies tend to have more modest returns, but are better able to maintain their payouts.
- Cimic increased its dividend 6 times in the last 10 years – and the dividend per share is should grow by 19.0% in the coming year.
3. Security of dividends
Attractive high yields obviously turn heads – but it’s important to know that a dividend is affordable. Dividend coverage (similar to payout ratio) is a benchmark measure of a company’s net income relative to the dividend paid to shareholders. It is calculated as earnings per share divided by dividend per share and helps indicate how sustainable a dividend is.
Dividend coverage of less than 1x suggests the company cannot fund the payment from its current year earnings – and could rely on other sources of funds to pay it.
- Cimic has dividend coverage of 1.71.
What does this mean for potential investors?
Yield, growth and security are the three main pillars that underpin some of the most popular dividend investing strategies. But it is important to know that dividend payments can be reduced or canceled very quickly when the outlook changes.
To better understand the dividend outlook of any stock, it’s important to do some research yourself. Indeed, we have identified areas of concern with Cimic which you can read about here.
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