It is therefore critical that investors individually assess the resilience of each potential investee company to ensure the dividend is secure in perpetuity and, preferably, able to grow on a compounding basis.
Many factors are relevant, from simple cashflow coverage ratios, to the underlying strength of the balance sheet: a qualitative assessment of the competitive environment, and an awareness of the precise cyclicality of the business.
Environmental, social and governance considerations are also crucial, as well as a keen understanding of the relevant regulatory backdrop.
Above all, investors must always be mindful of the truism that equities are long-term assets, and that the bulk of their value is typically derived from cashflows expected to be generated well into the future.
Absolute risk to capital must be as low as is practical; downside risk is as important as upside participation. An income investor’s goal, therefore, is not just to find high dividend yields, but more importantly to find sustainable yields that are capable of growth.
Julian Bishop is global equities analyst at Sarasin & Partners
