Dividend payouts are an essential part of the return investors get from owning stocks over time. But with the economic pressures caused by Covid, it has become difficult to assess whether dividend forecasts are still useful. Could companies with even the most impressive track records cancel their payouts in order to preserve cash?
Let’s take a look at Formosa Chemicals and Fibers (TPE: 1326) and some of the most important dividend data points to watch…
What Makes a Reliable Dividend Payer
1. Security of dividends
It is important to know that a dividend is affordable, especially in times when it is necessary to save money. For this, you can use Dividend Cover – a go-to 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.
Companies with less than 1x dividend coverage suggest that the company cannot fund the payment from its current year earnings – and could rely on other sources of funds to pay it. Right now, one has to wonder how easy it will be to raise capital just to pay a dividend.
- Formosa Chemicals & Fiber a dividend coverage of 1.34.
2. High (but not excessive) dividend yield
High dividend yields are obviously attractive, but watch out for yields that are too high as they may signal underlying problems. When the market suspects that a company may be unable to sustain its dividend, the stock price drops, which in turn pushes the yield up. A dividend yield of 10% or higher is a signal that a dividend may be too good to be true.
- Formosa Chemicals & Fiber has a dividend yield of 6.50%.
3. Dividend Growth
Another important marker for assessing the reliability of a dividend is a history of dividend growth – which can usually be used as evidence 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 better able to maintain their payouts.
- Formosa Chemicals & Fiber increased its dividend 4 times in the last 10 years – and the dividend per share is should grow by 104.9% in the coming year.
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 for any stock, it’s important to do some research yourself. Indeed, we have identified areas of concern with Formosa Chemicals & Fiber which you can read about here.
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