The cuts are a timely reminder that investors should always be cautious, particularly when enjoying a high yield.
Richard Pearson, Director at Selftrade, says: “Centrica’s announcement of a 58% cut to its dividend is another instance when ‘it’s too good to be true’ can turn out to be exactly that. Investors can get caught on the hoof when a company decides to change its policies, but the signs are often there for months before the cut is made. It is important investors do their research because it’s often the case that a company’s share price will take a tumble on the announcement of a dividend reduction, which can be a double blow.”
So, what can what should income investors do in this climate of dividend cuts? These are Richard’s tips.
1. Look out for the warning signs
When investing for income, look at the level of dividend cover a company has. This is the amount of profit it makes divided by the dividend it pays; the higher the better as it means it can continue to maintain and grow dividends even when it has a bad year. Companies with a dividend cover of two or above are usually seen as a safer choice.
Investors could also look at companies’ cash flow statements to see how realistic it is for them to maintain dividends. What do they need to pay to service their debt, pay their taxes, top up old pension schemes and how much is left to pay dividends?
2. Diversify to shelter your income
As ever, a diverse portfolio can soften the blow in the event of dividend disappointments. Diversification is particularly important for income focussed investors as, after a dividend cut investors need to find an alternative source of income but could be forced to sell at a depressed price to get this.
3. Consider certain sectors for long term dividends
Investors should consider which sector a company operates in. Is the business likely to need expensive capital investment to maintain its relevance or keep up with its competitors?
Utilities often offer good yields as they are mature businesses that have fewer growth opportunities to pursue, therefore they return a good portion of their cash flow to shareholders in the form of dividends.
Looking for new avenues for income?
To make sure your portfolio isn’t derailed when a company cuts its dividend, investors should consider income funds. The Artemis Income fund is the most popular choice among Selftrade customers, hardly surprising when you consider that manager Adrian Frost has been running it since 2002 and consistently delivered healthy returns.
For those looking further afield, Artemis also runs a Global Income fund that is popular amongst our customers. It boasts a good track record since launch in 2010 and, with a bias towards North America and Europe, the fund includes some global giants to add some geographical diversification.
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Artemis Fund Managers Ltd Artemis Global Income I Acc
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Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.
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