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Bodycote passes these three dividend tests

Fri 8:43am by Ben Hobson

With tens of billions paid out in dividends across the stock market each year, it's no surprise that  investors pay close attention to the payouts from shares like Bodycote (LON:BOY). 

The return 'boost' from cash payouts is a crucial part of the total return you get from shares. And in volatile market conditions, these payouts are more important than ever.

But the challenge for investors is tracking down the best and most dependable dividends. With so many ways of assessing these payouts - and so many potential traps - it's important to focus on the most useful measures.

To help you find the best dividends possible, there are a few key measures to remember. Let's take a look at Bodycote as an example of what to look for.

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1. High (but not excessive) dividend yield

Yield is an important dividend metric because it tells you the percentage of how much a company pays out in dividends each year relative to its share price. That makes it easy to compare dividend payouts right across the market.

High yields are obviously appealing but be careful of excessively high yields (usually above 10%) because they can be a sign of problems. When the market suspects a company may be unable to sustain its dividend, the share price will fall and actually push the yield higher - and this can be a trap. So it pays to be wary of excessive yields.

  • Bodycote is a player in the Machinery, Equipment & Components industry. It has a dividend yield of 3.87%.

2. Dividend growth

Another important marker for income investors is a track record of dividend growth - and evidence that the growth will continue. Consistent dividend growth can be a pointer to companies that are carefully managing their payout policies - and rewarding their shareholders over time. Rather than aggressively dishing out earnings, dividend growth companies tend to have more modest yields, but are better at sustaining their payouts.

  • Bodycote has increased its dividend payout 9 times over the past 10 years - and the dividend per share is forecast to grow by 0.035% in the coming year.

3. Dividend safety

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

Dividend cover of less than 1x suggests that the company can’t fund the payout from its current year earnings - and might be relying on other sources of funds to pay it.

  • Bodycote has dividend cover of 2.19.

Next steps

With these three important rules, you can track down shares that offer a reasonable yield, with a record of growth and safety. On this basis, Bodycote could be worth a closer look.

To find out more you might want to take a look at the Bodycote StockReport from the award-winning research platform, Stockopedia. StockReports contain a goldmine of information in a single page and can help to inform your investment decisions.

To find more stocks like Bodycote, you'll need to equip yourself with professional-grade data and screening tools. This kind of information has traditionally been closely guarded by professional fund managers. But our team of financial analysts have carefully constructed this screen - Stockopedia’s Dividend Stock Ideas - which gives you everything you need. So why not come and take a look?

Plus, if you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.

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