“Some of the companies with the juiciest looking dividend yields have dividend cover that looks particularly skinny,” fund ratings agency AJ Bell noted in its dividend forecast report for 2017 and 2018.
Worryingly, the average cover across the 10 highest yielding stocks of the FTSE 100 firms is just 1.20 times (x) for 2017. Lloyds is the only company within the top 10 that has a dividend cover anywhere near the 2.0x comfort level.
Dividend cover refers to the amount of profit a firm makes divided by the dividend it pays out to shareholders.
If a company’s dividend cover is 1.5x or less, it is well within the “danger zone,” explained AJ Bell, because it means that it has less wiggle room to meet its payments to shareholders if profits fall in one year.
Investors need not look further than the recent perils at Pearson and Provident Financial to see just how quickly things can deteriorate.
“Dividend cover that falls below 1.0x should ring alarm bells because it means the company is paying out more to shareholders than it makes in one year,” the firm said.
When this happens, firms will be forced to dip into cash reserves, sell assets or take on more debt to maintain its payment to shareholders, actions that are likely unsustainable in the long-term.
So, which FTSE 100 favourites have fallen in the danger zone for 2017? Portfolio Adviser examines …