With interest rates easing and T-bill yields on a sustained decline for well over a year now, more investors are pulling cash out of “safe” instruments and looking for income elsewhere.
That is a sensible instinct.
But it comes with danger.
As savers hunt for yield, some start reaching for the highest number on the screen, without asking why that number is so high in the first place.
A high yield is not the same as a good dividend
A stock yielding 9% looks far more attractive than one yielding 4%, at first glance.
But a dividend yield only tells you the payout divided by the share price.
It says nothing about whether that payout can be sustained.
Sometimes a high yield reflects a falling share price, as the market prices in an expected cut.
Sometimes it reflects a company paying out more than it can comfortably afford, borrowing to keep the number looking attractive to shareholders.
Either way, chasing the highest yield on offer is one of the fastest ways to end up owning a dividend that gets cut right after you buy in.
So what should you be looking at?
4 Traits:
- Track record
How many years has the company paid a dividend without a break, and did it keep paying through periods when paying was genuinely hard?
A multi-decade record, especially one that spans a financial crisis or two, is excellent proof that it is able to keep paying for years to come.
- Payout sustainability
What share of earnings does the company pay out?
A company paying out 90% or more of its profits has almost no buffer left if earnings dip.
But one paying out 40% to 50% has plenty of room to keep the dividend intact even in a weaker year.
- Cash flow
A company that consistently generates more free cash flow than it needs to fund its dividend is in a much stronger position than one where the numbers are barely covered.
- Business quality
Does the company have something that protects it from competitors, a strong brand, a structural monopoly, a diversified customer base?
Businesses with staying power are the ones still paying a decade later.
A simple checklist
Before buying a stock for its dividend, ask:
- Has it paid without interruption through at least one economic downturn?
- What percentage of its earnings does it pay out, and does that leave room to breathe?
- Does its free cash flow comfortably cover the dividend, year after year?
- What protects this business from a competitor simply taking its customers?
Get Smart: Track record beats today’s yield
The next time you see a dividend stock yielding far more than its peers, do not ask how high the number is.
Run it through the checklist instead.
In fact, we did it ourselves.
We scoured the SGX for companies that paid a dividend every single year for 20 years or more, spanning the 2008 Global Financial Crisis, the 2020 COVID lockdowns, and 2022’s rate shock.
Then we checked each one against the checklist above, from decades of uninterrupted payouts, to conservative payout ratios, to free cash flow that comfortably covers the dividend, to the kind of business quality that keeps competitors out.
6 companies passed on every count.
Our free report, Dividend Dynasty, walks through exactly how 6 SGX companies passed this test, and what made each one different.
Download your copy today here.
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