In turbulent economic times, income investors face tough choices about where to seek the best returns – the same goes for the dividends offered by a stock like Imerys SA (EPA:NK) is it worth going further?
With so much uncertainty around the sustainability of certain dividends, it’s understandable that investors are looking for the best payouts available. Part of the challenge is that stocks offering attractive high yields can often turn out to be a mirage. Dividend cuts have swept the market over the past year. The pain for investors is real. So what should you be looking for in the search for sustainable dividend income?
Here is a checklist of measures and a summary of the reasons Imerys SA dividend scores well against them…
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.
- Imerys SA has a dividend yield of 5.58%.
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 distributing earnings, dividend-growing companies tend to have more modest returns, but are more apt to maintain their payouts.
- Imerys SA increases its dividend 7 times in the last 10 years – and the dividend per share is is expected to grow by 8.06% over 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.
- Imerys SA has dividend coverage of 2.19.
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 Imerys SA which you can discover here.
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