Friday 1 January 2016

Dividends Uncovered?

'Dividend cover'
is one of the key ratios that income investors should be looking at, as it is a measure of how affordable the dividend payments are for a company. However, like most things in investing, it pays to do a little more research into the underlying situation - and the level of commitment of the company management to income-oriented investors.

As most DIY Income Investors will be aware, 'dividend cover' is usually given as the ratio of the company's net profit to the dividend payout - in other words, how many times the company could pay out the dividend from profits. Ideally you would like to see dividends covered at least twice, or at least one-and-a-half times.

Usually companies like to be consistent with dividends - maintaining them or increasing them. However, sometimes the dividend just gets out of whack with the level of profit when times are hard and occasionally drastic action is needed in order to demonstrate responsible financial management. The management know that cutting the dividend will send a powerful message to the market - but this message is mixed: both negative and positive, The usual response is a fall in share price, which means the dreaded 'double whammy' for DIY Income Investors (loss of dividend and fall in share price).

Source: AJ Bell YouInvest

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. carnival seem to yield 1.9% and even increasing to $1.20 for 2016 would only be 2%. Special div is possible and not reflected in cover ratio. P/e 21.

  2. Looks like a buying opportunity this year. Invest in companies with good business model and reliable dividend history. Problem is to avoid the next bank or supermarket share...

  3. When stock markets plunge 40% this year you guys are gonna lose all your dividends and most of your capital. This is proverbial picking pennies in front of steamrollers. I know you're trying to focus on value, but with central banks distorting markets, there is no value... just bs.

    1. Well Anon, if you have that power of foresight you should be a millionaire by now! But even with the horrible 6 or 7 months we have had, my portfolio is down only around 5% in the 2015/16 FY. Not happy about it but it's far from being a disaster for this investing style.