Telecoms giant Vodafone recently sent shockwaves through its investor community when it announced it was to slash its £4bn a year dividend payment by 40%.
Vodafone pays its dividends twice a year – an interim and a final – the latter of which will be a payment of 4.16 cents in June 2019.
This is a significant drop when compared with the final dividend of 10.23 cents paid to investors in 2018.
It isn’t the only one either. BT shaved 4.7% off its interim dividend back in November 2018 and new CEO Philip Jansen, who joined the firm in February this year from WorldPay, has hinted that future cuts could be on the cards as the business steps up ‘full-fibre’ target.
So should investors, for whom income is a portfolio requirement, be concerned about the sustainability of dividend heavyweights, given the recent action from two major payers?
At a time when interest rates on high street savings accounts are paying peanuts and the yield on a 10-year gilt is hovering around the 1% mark, it is easy to be swayed by the offer of a dividend yield of 7-9%.
Outside of Vodafone and BT, supermarkets Sainsbury’s and Morrisons, and housebuilder Persimmon, all offer a decent yield to shareholders.
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But it pays to be diligent. In volatile markets, such as those we are currently experiencing, where taking the wrong business decision could see a business fall to its knees, it is vital that the company makes enough to cover its dividend to shareholders.
For a maths whizz, or even someone with a calculator at hand, it is relatively simple to work out whether the company you are looking at investing in has a sustainable dividend = divide ‘earnings per share’ by ‘dividend per share’.
This is the dividend cover and, as a rule of thumb, analysts suggest that anything upwards of two times is good. Below that, and any significant dip in earnings could see that much-needed income stream disappear.
There is, of course, another way. Instead of investing in a blue-chip stock with a high yield, investors could choose a range of medium-sized companies, offering a smaller yield, but with a better dividend cover.
While there is no guarantee either way of a sustainable, or increasing, dividend payout, little and often could better diversify that income stream so that if one is cut you don’t take a major hit.
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