How investors can spot dud income stocks
The trouble with “cover”
A better bet is to look at a firm’s cash flows (a topic I cover in more detail at Killik.com/learn “financial statements”).
Investors should also watch out for three red flags that may suggest a firm is in dividend distress – that is, it getting more and more desperate to maintain its annual dividend and seeking more questionable means to do so.
Taking on extra debt
If a firm needs to conserve cash flow in order to meet dividend payments, it could look to cut back on investment. This may come in the form of reduced R&D and/or reduced capital expenditure. It can be tricky to spot but some warning signs include;
· Changes in the ratio between R&D expenditure and sales
· Changes to the assumed useful lives of existing long-term assets as the firm tries to avoid spending money on replacing them
To discuss Killik & Co’s dividend screening process, or to discuss individual stocks in the context of dividend risk, please contact an Investment Manager.