Estimating Future Dividend Growth
Estimating future
dividend growth is difficult if not impossible. Companies which might have had a
long history of consistent double digit increases might stop raising dividends and might even cut them. It is easy to predict whether or not a company's
dividend is
sustainable in the short run, by evaluating EPS trends, dividend payout ratios and cash flows. It is difficult to forecast however whether the dividend won't be cut several years down the road.
Financial companies such as Bank of America (BAC) and US Bancorp (USB) are two prime examples of this. After raising distributions for several decades, and always spotting above average dividend yields, the companies had to cut dividends amidst the global financial crisis of 2007-2009. The stocks were often priced attractively before 2006-2007, with adequately covered dividends, attractive valuations and very good current yields at the time. Fast forward two years and these former dividend darlings have cut their dividends sending retiree's alternative incomes into a tailspin.
While it is somewhat easier to predict short term movements in dividends, based off the actions in recent years, astute dividend investors need to be aware of the warning signs of a potential dividend cut or freeze.
First, if a company stops producing earnings growth, then chances are that dividend growth would be limited.
Second, if the company has taken on too much debt, it might end up cutting dividends in order to free some cash flows to repay creditors and avoid going under.
The above story is the opinion of the author only and it does not reflect
iStockAnalyst opinion. Further, the author is not personally advising you
regarding the suitability of the story for your investment needs. In no event
iStockAnalyst will be liable for any loss or damage including without
limitation, indirect or consequential loss or damage, or any loss or damage
whatsoever arising from or arising out of, or in connection with the use of this
information. Please consult your investment advisor before making any investment
decision.
