QUESTION: Dividend strategies: how to evaluate the sustainability of a company's dividends?
Answer
Evaluating the sustainability of a company's dividends requires a deep analysis of its financial statements rather than simply looking at the current dividend yield. A high dividend yield is often a "dividend trap," where stock prices fall and the business experiences temporary difficulties. A reliable issuer should pay dividends from net profit rather than by increasing debt loads or selling off non-core assets.
On the topic of dividend strategies, a systematic scheme for evaluating and selecting issuers for the portfolio usually works.
•Determine the current point of the business by studying the latest IFRS reports and evaluating the dividend payout ratio.
•Set a success metric, such as a stable increase in dividends over the past five years or more.
•Choose screening and analytics tools to select companies with low debt and stable free cash flow.
•Set a deadline for a regular portfolio audit before each dividend season.
•Automate regular actions to reinvest dividends and purchase shares of trusted companies.
Following this step-by-step instruction allows you to form a reliable portfolio of dividend stocks that will delight you with regular payouts regardless of market cycles.
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