5 Signs of a Dividend in Danger

With appetite strong for higher-yielding shares, it's important investors take notice of signs that a dividend might be in danger

Todd Wenning 17 July, 2012 | 8:35AM

Even though UK dividend payouts hit a record high in the first quarter of 2012, the risk of dividend cuts remains very real. Indeed, so far this year we’ve seen cuts from a few notable names like Home Retail (HOME) and Kesa Electricals (KESA), and a suspended dividend from Thomas Cook (TCG). And with investors turning to higher-yielding shares in this low interest rate environment, it’s important for investors to take notice of five signs that may reveal a dividend in danger of being cut. 

A Declining Dividend Cover Trend
Companies that aren’t generating enough free cash and profit to cover their dividend are more likely to have an at-risk payout. Intuitively it makes sense: a firm that covers each £1of dividends with 90p in free cash will have trouble maintaining that payout.

The trouble is that looking at just one year of data can be misleading as the company could have had an unusually good or bad year. Instead, review a company’s dividend cover ratio over a number of years in order to ascertain a possible trend.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Todd Wenning

Todd Wenning  is an equities analyst with Morningstar.

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