Tag Archives: dividend safety

How to Increase Your Income Every Year

Do you want to increase your income every year? Who doesn’t? Instead of counting on a raise from your job, you can get a raise year after year by putting it in your own hands. Here’s how.

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Invest in dividend stocks consistently

You can invest in any “safe” income-producing vehicles consistently to get an ever increasing income. Such vehicles include real estate, farms, and dividend stocks.

In this article, we’ll focus on dividend stocks. By consistently, I mean that you invest every month, quarter, or year. Get this. By buying safe dividend stocks over time, your income can only increase.

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What is a Good Dividend Payout Ratio?

What is a good dividend payout ratio for a company? Is 70% too high? Does a company with a low ratio imply high dividend growth?

Using a concrete example, we’ll answer 3 simple questions to figure out if a company has a good dividend payout ratio that supports a healthy dividend. You can ask the same questions for any dividend company you’re interested in.

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However, a payout ratio based on earnings may not be appropriate for companies with big depreciation. Cash flows instead of earnings are better used in such cases, including for REITs and MLPs.

What is the payout ratio?

The payout ratio is the percentage of earnings that are paid out to shareholders as dividends.

For example, Fortis Inc’s  (TSX:FTS) is expected to pay out $1.525 per share of dividends in 2016. The company just hiked its Q4 dividend to $0.40 per share.

  • Fortis’s originally quarterly dividend per share was $0.375.
  • $0.375 * 3 + $0.40 * 1 = $1.525

Its earnings per share are estimated to be $2.17 in 2016. So, Fortis’s payout ratio is about 70%.

  • Annual dividend per share / Earnings per share
  • $1.525 / $2.17 = 0.7028

So, Fortis retained about 30% of its earnings to grow its business or repay its debt, etc.

A lower payout ratio implies a safer dividend than a higher ratio. Read More

How to Know If a Dividend is Safe

To determine if a dividend is safe or not, one must analyze the company that’s paying the dividend. There are multiple things to look for.

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Is the company financially strong?

Dividend companies with financially strong profiles are less likely to cut their dividends. So, invest in companies with credit ratings of BBB+ or better to improve your dividends’ safety.

For example, Telus Corporation (TSX:T)(NYSE:TU) has a BBB+ S&P credit rating.

Are the earnings stable?

As one of the leading Canadian telecoms, Telus also earns stable cash flows and earnings from its subscribers. It has 12.4 million total subscriber connections, including 8.5 million wireless subscribers (about a third of the market), 1.6 million high-speed Internet subscribers, and one million TV subscribers.

Businesses that are dependent on volatile commodity prices, including oil and gas producers and mining companies, will experience volatile earnings. Read More