Three clues for a sustainable dividend at RM
In turbulent times, income investors face tough choices about where to seek the best returns – the same goes for the dividends offered by stocks such as RM (LON: RM.) Worth to be considered?
With so much uncertainty around the reliability of certain dividends, it’s understandable that investors are looking for the best payouts available. Part of the challenge is that attractive high-yielding stocks often turn out to be “dividend traps” – where payouts are quickly reduced. So what should you be looking for in the search for sustainable dividend income?
Below is a measurement checklist and a summary of why RM’s dividend scores well against everyone…
1. High (but not excessive) dividend yield
Yield is an important measure of dividends because it tells you the percentage of the amount a company pays out in dividends each year relative to its stock price. This makes it easier to compare dividend payouts across the market.
High returns are obviously attractive, but watch out for returns that are too high (usually above 10%) as they can signal trouble. When the market suspects that a company is unable to sustain its dividend, the stock price drops and actually pushes the yield up – and that can be a trap. It is therefore better to be wary of excessive returns.
- RM has a dividend yield of 3.96%.
2. Dividend Growth
Another important marker for income-oriented investors is a history of dividend growth – and proof 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 spreading their earnings, dividend-growing companies tend to have more modest returns, but are better able to maintain their payouts.
- RM increased its dividend 8 times in the last 10 years – and the dividend per share is is expected to grow by 11.7% over the coming year.
3. Security of dividends
Attractive high yields obviously turn heads – but it’s important to know that a dividend is affordable. Dividend coverage (similar to payout ratio) is a benchmark 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.
Dividend coverage of less than 1x suggests the company cannot fund the payment from its current year earnings – and could rely on other sources of funds to pay it.
- RM has dividend coverage of 3.53.
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 of any stock, it’s important to do some research yourself. Indeed, we have identified areas of concern with RM which you can read about here.
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