Here’s a small-cap stock that dividend investors will love

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Regular and reliable dividend payouts are popular with investors, especially during times of economic uncertainty. But finding stocks that can pay them isn’t easy. High yields may seem tempting, but they can also be the first harbingers of possible dividend cuts – so it’s important to be cautious.

To help you navigate this uncertainty, you need a checklist that covers the most important aspects of dividend investing strategies. It also helps to remove emotions from the decision-making process.

With a few key rules, it is much easier to find higher quality dividend stocks in a methodological way. Hargreaves Servicesthe dividend is an example of using a checklist to identify a healthy and sustainable dividend…

Get insights based on data in LON:HSP

Dividend Stock Search Rules

1. Security of dividends

Attractive high yields obviously turn heads – but it’s important to know that a dividend is affordable. Dividend coverage (similar to payout ratio) is a benchmark measure of a company’s net income relative to the dividend paid to shareholders. It is calculated as earnings per share divided by dividend per share and helps indicate how sustainable a dividend is.

Dividend coverage of less than 1x suggests the company cannot fund the payment from its current year earnings – and could rely on other sources of funds to pay it.

  • Hargreaves Services has a dividend coverage of 3.83.

2. Dividend Growth

An important marker for income-oriented investors is a history of dividend growth – and proof that growth will continue. Steady dividend growth may indicate that companies are carefully managing their distribution policies and rewarding their shareholders over time. Rather than aggressively spreading their earnings, dividend-growing companies tend to have more modest returns, but are better able to maintain their payouts.

  • Hargreaves Services has increased its dividend 5 times in the last 10 years – and the dividend per share is is expected to grow by 6.25% over the coming year.

3. High (but not excessive) dividend yield

Dividend yield is an important financial measure of dividends because it tells you the percentage of the amount a company pays out in dividends each year relative to its stock price. This makes it easier to compare dividend payouts across the market.

High yields are obviously attractive, but beware of too high yields. Usually, returns above 10% are a signal to suggest that there are underlying issues with a stock. Indeed, when the market suspects that a company is unable to maintain its dividend, the stock price drops and actually increases the yield. It is worth being wary of excessive yields.

  • Hargreaves Services has a dividend yield of 3.71%.

What does this mean for potential investors?

Yield, growth and security are the three main pillars that underpin some of the most popular dividend investing strategies. But it is important to know that dividend payments can be reduced or canceled very quickly when the outlook changes.

To better understand the dividend outlook of any stock, it’s important to do some research yourself. Indeed, we have identified areas of concern with Hargreaves Services which you can read about here.

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