Why the Somero Enterprises dividend deserves a closer look

UK stocks paid out an eye-watering £100 billion in dividends last year. While big, blue-chip names often dominate the discussion when it comes to dividends, high yielding small and mid-cap stocks like Somero Enterprises Inc (LON:SOM) still pack an impressive punch.

Given the unsettled market conditions over the past year, those record-breaking payouts were more important than ever. They were proof that solid, high yielding dividend stocks are a strong source of investment profits in both good times and bad.

These kinds of dependable returns are a major reason why high yielding shares are so popular. So how do you find them?

Well, there are various ways of finding the most attractive dividends, but I’ll show you a strategy with some basic rules to put you on the right path to finding some of the best dividend stocks in the market. Let’s look at the Somero Enterprises Inc dividend as an example of how it works.

Three rules for finding dividend shares

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. High yields are obviously appealing, but caution is needed. When the market anticipates a dividend cut, the share price will fall, which actually pushes the yield higher - but this can be a trap. So it pays to be wary of excessive yields.

• Somero Enterprises Inc is an adventurous, small cap in the Machinery, Equipment & Components industry and has a market cap of £146.5m. It has an eye-catching dividend yield of 7.36%.

2. Dividend growth

Another important marker for income investors is a track record of dividend growth. Progressive dividend growth can be a pointer to payout policies that are being handled carefully by management. Rather than aggressively dishing out earnings, dividend growth companies tend to have more modest yields, but are better at sustaining their payouts.

• Somero Enterprises Inc has increased its dividend payout 6 times over the past 10 years.

3. Dividend cover

Attractively high yields obviously turn heads - but it’s important to know that a dividend is affordable. Dividend cover 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.

• Somero Enterprises Inc has dividend cover of 1.51.

What does this mean for potential investors?

Yield, Growth and Safety are the three main pillars that support some of the most popular dividend investing strategies. But it's important to know that dividend payouts can be cut or cancelled very quickly when the outlook changes.

To get a fuller understanding of the dividend prospects for any stock, it's important to do some investigation yourself. Indeed, we've identified areas of concern with Somero Enterprises that you can find out about here.