A dividend cut is an income investor’s worst nightmare. And most of the time, dividend payouts are cut without much warning.
Unfortunately, it’s not possible to accurately predict every dividend cut before it happens, but you can reduce the risk of being caught by surprise.
Market screen
Every month, analysts at investment bank Société Générale put out a list of companies that they believe have some of the most secure dividend payouts in developed equity markets.
The bank’s analysts screen the market for companies that have a dividend yield in excess of 4%, have a strong return on capital and robust balance sheet. All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen.
This month there were only five UK companies that made it into the top 25 qualifying companies.
Pass the test
NEXT (LSE: NXT) is one of Société Générale’s top income stocks due to its return on capital of 59% and strong balance sheet.
What’s more, the company is focused on returning cash to investors. This year, analysts believe that the company’s shares will support a dividend yield of 4.3% as regular dividends are set to be complimented by special payouts.
Over the past six years, NEXT’s dividend payout has risen at a rate of around 18% per annum.
Lucrative business
Homebuilder Taylor Wimpey (LSE: TW) also passes the “quality income” screen.
Taylor is set to support a dividend yield of 5% this year, and the payout will be covered one-and-a-half times by earnings per share.
At the end of 2014 Taylor reported a net cash balance of £112m, so the company has plenty of cash on hand to support the payout if business slows.
Homebuilders feature heavily on the list with Persimmon (LSE: PSN) also making the cut. Persimmon is set to support a dividend yield of 5.3% this year and the payout set to be covered one-and-a-half times by earnings per share.
At the end of 2014 the company had just under £400m of cash with no debt, giving it enough capital to maintain its current dividend payout for two years if business dries up.
Similarly, Berkeley Group (LSE: BKG) made the cut for Société Générale’s quality income screen.
Berkeley currently supports a dividend of 6.3% and the payout is covered twice by earnings per share. Just like Persimmon and Taylor, Berkeley has a net cash balance of £150m and produced a return on capital of 29% during 2014.
Room for growth
And the last UK company to make the cut on Société Générale’s income screen is Talktalk Telecom (LSE: TALK).
Talktalk is set to yield 4.1% this year and according to City analysts, the company will hike its dividend payout by around 13% next year. However, at present Talktalk’s dividend is only just covered by earnings per share.
Still, over the next two years Talktalk’s earnings are set to expand at around 50% per annum, leaving plenty of room for payout growth in the near future.
