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Making Sure Your Dividends Are Safe

Dividends are a wonderful source of passive income for investors. As a part owner of a business, you are paid a share of your company’s profits for doing basically, nothing –nothing, that is, besides an adequate study of the company’s underlying business before plonking down your cash to make the investment.

But, the study of a dividend share is seldom as simple as just focusing on a share’s seemingly high historical yields. Dividends can and do fall off a cliff at times and investors who were suckered into a high-yield alone might just pay the price with a bad loss.

For instance, the property developer and investment outfit Yanlord Land Group (SGX: Z25) had paid out a dividend of 9.31 Singapore cents in 2012, giving its shares a high trailing yield of 6.1% a year ago on 26 March 2013 at its price of S$1.51 then. In the company’s most recent financial filing however, dividends for 2013 had dropped by a third to 6.4 cents a share and its share price has since declined by a similar magnitude to S$1.065.

Of course, as a property developer, Yanlord Land’s profits can be lumpy and cyclical, so investors can’t expect growing dividends all the time. But at the same time, this serves as a reminder that a high yield is not a signal for a bed of roses for investors.

In light of that, how then, can investors make sure that their dividends are safe? We can start with the important numbers. While a company’s historical financials aren’t the only important thing investors should consider, there’s also some value to be had in poring through past financial numbers for some clues on the relative safety of a company’s dividend.

Here’re some important figures to consider:

1. Dividend history

Companies with consistently growing dividends over a long stretch of time give us a clue that they’ve done something right in the past and could be fertile grounds for unearthing potential investing opportunities.

And, the best thing is that such companies – the ones with a strong history of growing dividends – can often be well-known behemoths in our local stock market. We can take, for instance, the conglomerate pair of Jardine Matheson Holdings (SGX: J36) and Jardine Strategic Holdings (SGX: J37). Both shares are part of Singapore’s stock market benchmark, the Straits Times Index  (SGX: ^STI), and have grown or maintained their dividends with each consecutive year over the past decade and more.

Year

Jardine Matheson’s dividends

Jardine Strategic’s dividends

2001

US$0.265

US$0.145

2002

US$0.300

US$0.145

2003

US$0.330

US$0.145

2004

US$0.400

US$0.152

2005

US$0.450

US$0.160

2006

US$0.500

US$0.170

2007

US$0.650

US$0.180

2008

US$0.750

US$0.190

2009

US$0.900

US$0.200

2010

US$1.150

US$0.210

2011

US$1.250

US$0.225

2012

US$1.350

US$0.240

2013

US$1.400

US$0.255

Source: S&P Capital IQ

There’s a market-beating mutual fund (the equivalent of a unit trust here) in the USA called the Goldman Sachs Rising Dividend Growth Fund which places a heavy emphasis on consistent dividend growth as a selection criteria for investment. Though I’m certainly not making any recommendations with regard to Jardine Matheson Holdings and Jardine Strategic Holdings, the existence and market-beating performance of the Rising Dividend fund is a testament to the efficacy of investing in shares that manage to bump up its pay outs each year without fail.

2. A share’s balance sheet and cash flow histories

All things equal, a strong balance sheet – one with piles of cash and low or no debt – gives a company plenty of lee way to maintain its pay-out even in lean times. And since a company’s dividend ultimately comes from its cash flows, it would also pay for investors to keep an eye on the cash flow statement and see if the cash a company brings in from its business operations can adequately cover its dividend over the years.

Foolish Bottom Line

Picking dividend shares based on their yields alone can be a dangerous affair. More thought has to go into its historical business performance and its future prospects to be able ensure the safety of your treasured dividends.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.