Investing for income

The past few years has been difficult for those who invest for income, with much publicised dividend cuts.

The cuts are a timely reminder that investors should always be cautious, particularly when enjoying a high yield.

It is important investors do their research because it’s often the case that a company’s share price will take a tumble on the announcement of a dividend reduction, which can be a double blow.”

So, what can what should income investors do in this climate of dividend cuts? These are a few tips:

1. Look out for the warning signs

When investing for income, look at the level of dividend cover a company has. This is the amount of profit it makes divided by the dividend it pays; the higher the better as it means it can continue to maintain and grow dividends even when it has a bad year. Companies with a dividend cover of two or above are usually seen as a safer choice.

Investors could also look at companies’ cash flow statements to see how realistic it is for them to maintain dividends. What do they need to pay to service their debt, pay their taxes, top up old pension schemes and how much is left to pay dividends?

2. Diversify to shelter your income

As ever, a diverse portfolio can soften the blow in the event of dividend disappointments. Diversification is particularly important for income focussed investors as, after a dividend cut investors need to find an alternative source of income but could be forced to sell at a depressed price to get this.

3. Consider certain sectors for long term dividends

Investors should consider which sector a company operates in. Is the business likely to need expensive capital investment to maintain its relevance or keep up with its competitors?

Utilities often offer good yields as they are mature businesses that have fewer growth opportunities to pursue, therefore they return a good portion of their cash flow to shareholders in the form of dividends.

Looking for new avenues for income?

To make sure your portfolio isn’t derailed when a company cuts its dividend, investors should consider income funds.