Asked on 29 Apr 2019
How do I know if a company will keep on paying dividends?
I don't think anyone can say for sure. But a good place to look for guidance is the annual report or a chat with the investor relations/management. They usually provide some guidance on their dividend policy and how they plan to use the profit's.
If you're looking towards the sustainability of dividends, you can look at the free cash flow of the company and ask if they are able to maintain the current level of dividends paid out.
no matter how rich a parent, you never know when they will stop giving you pocket money whether they cannot give anymore or they decided to stop giving.
If companies cannot give dividends anymore, it may seem bad, but in bad times, this may also mean prudence in managing available funds.
again, dividend is another portion of cash flow management. How companies manage dividends at various financial health is a piece of the puzzle that shows the whole picture.
Look at historical DPU
Look at their CASH FLOW (Not earnings)
Look at their Debt
That being said, looking at these things still wont gaurantee they will keep paying dividends because there are things like black swans. Everything is all probability. So best to split your funds into a few, so if one stops giving, you are not affected too badly.
We dont know if the company will pay dividend forever. but we can estimate or predict.
few things to check:
consistent /growing dividend payment history
dividend payment policy.
do note: if debt is pilling up, and cashflow is getting weaker, these are signs that the dividends might drop/stop or unsustainable...
For dividend paying companies, look out for financial metrics:
Dividend payout ratio
These ratios is going to give you assurance that the company is giving out dividend without comprising themselves in the long haul. Do spend some time reading up more investment books
You can see their track records. You can get info from morningstar easily. If the company is paying dividend for the past 5 years, most probably it will continue to.
Well depends on what company you are talking about. If you are referring to REITs, they are obligated to distribute 90% of their income. That way you know that they will definitely pay you dividends. But whether that will be an increasing/decreasing trend over the years, that is a totally different question.
For other companies such as Singtel, Starhub etc.. You don't actually. But one red flag is looking at their earnings per share, dividends per share and cash flow. If DPSEPS, then you know that it's not sustainable at all and that company will either cut dividends or totally not give (because they are not obligated to).
All the answers with regards to financial ratios and statements only highlight the ability for a company to pay dividends.
The truth is you don't know. They don't have an obligation to keep paying dividends and can stop anytime.
Dividend Payout Ratio
Some other metrics that you can consider is the dividend payout ratio, which is Dividends/Net Income. The lower the ratio, the better, since it could suggest that the company has more funds to pay out as dividends.
Another metric that you might want to consider is to look at cashflow from investing activities as well. Some companies such as Keppel are very capital intensive, where there is a lot of cash spent on capital expenditures. Some companies also try to grow their cashflows through acquisitions or investments in other companies. Such cash outflow don't typically show up on your income statements directly, but they definitely affect how much dividends can be paid.
Another metric to compare between the companies is the amount of debt the company has. Debt means that cash would need to be left aside to pay off the debt in future, reducing the amount of cash left for dividends.
It is up to the management decision to whether to continue to give out dividends.
What we can do as an investor is only to check whether the dividend is sustainable based on these few factors.
Dividend Payout Ratio (Best to be less than 100%)
FCF (Dividend payout must be less than FCF to be sustainable).
Look at operating cashflow and amount paid to shareholders. If amount paid is more than operating cashflow, the dividend payout is unsustainable and unlikely to continue long.
Past 5 year profits. Ideally, profits should be increasing year on year. This means that company is earning more and they are able to reward shareholders more.
Past 5 year dividend yield/policy. Some companies have policies on the percentage of dividend yield. If dividend yield is very low/policy not present, it is possible for the company to pay low/no dividend. E.g Berkshire
We wont know. All you can do is analyse the cashflow statement of a company's past years statement, then make an educated guess into the future if the cashflow generated by the company is capable of sustaining the payment of dividends
There is no way to confirm this. The best alternative is to make an intelligent guess based on the past track record.
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You never know, cos whether dividends are paid out are based on the discretion on the mgmt.
Which is why Dividend Kings, Aristocrats in the US stock market are so favoured by dividend investors in general