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The Importance Of Consistently Covered Dividends

Jun. 08, 2020 10:31 AM ETJSAIY, JSNSF, AGBAY, TBAKF, TBAKY, BBRYF, BURBY7 Comments
John Kingham profile picture
John Kingham


  • This article goes back to basics and outlines why a consistent record of dividend payments is the first thing I look for in a company.
  • Why dividend cover is the first of many ratios in my investment spreadsheet.
  • Dividends support efficient capital allocation, create commitment and accountability and are a helpful yardstick.

Dividends make up the backbone of my investment strategy, so the first thing I look for in a company is a track record of consistent and sustainable dividends.

If you’re new to investing, here’s a quick definition:


Dividend per share (DPS): Dividends are cash payments made from a company to its shareholders. In theory, cash should be paid out to shareholders as a dividend when the company cannot invest that cash within the business at an attractive rate of return.

There are several reasons why dividends are central to my approach. The most important reasons are:

Dividends support efficient capital allocation

A company should only retain cash generated from operations if that cash can be used to produce an attractive return. The main uses of retained cash are:

  1. Maintaining the existing business
  2. Organically growing the business (e.g. buying stock or investing in factories, stores or equipment)
  3. Acquiring other companies
  4. Paying down debt
  5. Buying back shares

When those options are exhausted, cash should be returned to shareholders as a dividend.

With companies that don’t pay a dividend there is, in my opinion, a greater risk that cash retained within the business will be used to expand the CEO’s empire (and pay packet) rather than maximise returns for shareholders.

Dividends create commitment and accountability

Companies with progressive dividend policies have made a promise to investors that they will maintain or grow the dividend each year.

This provides a public and very concrete goal for management to achieve. Of course this promise can be broken, but on average dividend-paying companies have historically performed better than non-dividend payers.

Dividends are a helpful yardstick

A progressive dividend gives investors a gauge for the long-term progress of a company. While earnings (and to a lesser extent revenues) bounce around from year to year, a progressive dividend can

This article was written by

John Kingham profile picture
I write about high-quality UK dividend growth stocks and value them on an intrinsic value basis using discounted dividend models.

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Comments (7)

GabsterX profile picture
Thanks for the article. I prefer looking at FCF dividend cover since dividends are paid out from cash not earnings, luckily this ratio is available on Sharepad and can easily be plotted.

A combination of both (FCF and EPS) is necessary for sustainability, I learned this the hard way with VOD and IMB..
timddeb profile picture
Never sell unless you have a better use for the money. Sometimes SP growth is better than a high dividend, so buybacks would seem to support that.
SDS (Seductive Dividend Stocks) profile picture
>5. Buying back shares
>When those options are exhausted, cash should be returned to shareholders as a dividend.
Hmm... buyback is exhausted when ALL shares will be bought, so company will have no shareholders......
Are you sure in the statement above 8-)?

John Kingham profile picture
Good point. I should have said those uses of cash (organic investment, acquisitions, buybacks etc) should only be used if the expected rate of return is higher than the risk adjusted market return. So pick the one that produces the best shareholder return and if that's dividends, they pay dividends.

In reality companies and investors usually like a steady dividend rather than one that bounces around based on what options management has for deploying cash, so sometimes debt will be used to fund expansion rather than cutting the dividend to self-fund the expansion, but the general idea of allocating cash into those buckets based on expected risk adjusted return still stands.
British stocks are super cheap. I've been telling that for a long time but it's still valid. Great dividends too. I'm long a bunch of them (BVIC, AZN, FLTR, DOM, UDG to name a few.
Guess my two financial dogs LYG and HSBC will be staying in the dog house for awhile.
MaritimeTrader profile picture
@nopilikia yes, don’t have those but have STAN which is similarily terrible.
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