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How secure is Redrow's 5.05% dividend yield?

17th May by Jack Brumby

There is some evidence that buying progressive dividend payers with solid balance sheets is a strategy well-rewarded by the market. After all, who doesn’t like a steady stream of predictable cash payments?

A reputation as a dependable dividend payer takes years to forge and, once created, is a valuable way for a company to signal its long-term profitability to the market and prospective shareholders. This is why, when it comes to dividend-paying companies such as mid cap Homebuilding operator Redrow (LON:RDW), which yields 5.05%, it is useful to check how well these payments are covered by earnings.

Earnings per share divided by dividend per share is called dividend cover - and it’s a great way to quickly gauge a company’s capacity to continue its dividend payments

GET MORE DATA-DRIVEN INSIGHTS INTO LON:RDW »

How to interpret Redrow’s dividend cover

Generally speaking, a dividend cover of below 1.5 times is cause for concern. Above 1.5 is good, but it is when you are getting above two times cover that you see the sign of a high-quality, sustainable dividend payment. Let’s see how Redrow measures up.

The group’s trailing twelve month (TTM) earnings per share are 87p and its TTM dividend per share is 29p. Dividing the former by the latter shows that Redrow has a TTM dividend cover of 3.01.

This is a positive sign for shareholders of Redrow. Other checks you can perform to assess dividend safety include:

  • Checking the current ratio is above 1.5 times and preferably above 2x
  • Making sure dividend per share is covered by free cash flow per share
  • Assessing balance sheet health by looking at the group’s gearing ratio

Income investing: what you need to know

For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.

As for Redrow (LON:RDW), you can find a wealth of financial data on the group's StockReport, including information on the group's past and forecast dividend payments. 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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