UK stocks paid out an eye-watering £100 billion in dividends last year, and the bulk of that cash came from the biggest and best-known companies in the FTSE 350 - including Kier.
There are various ways of finding blue chip dividends, but here is a strategy with some basic rules to put you on the right path to finding the best dividend stocks in the FTSE 350. Let’s look at the Kier dividend as an example of how it works.
A word of warning before we start: Kier Group (LON:KIE) recently announced it has an additional £40m of debt, following an accounting error. The firm is currently audited by Big Four firm PwC, and has suffered a succession of share slides and the exit of its CEO in recent months - so this company is not for the faint-hearted.
Four rules for finding dividend share
1. High (but not excessive) dividend yield
Yield tells you how much a company pays out in dividends each year as a proportion of its equity. High yields are obviously appealing, but caution is needed. A high yield can be the market's way of saying it is expecting a dividend cut, so it pays to be wary of excessive yields.
- Kier has an eye-catching dividend yield of 7.04%. This is attractive, but yields at this level can also be a warning that the market anticipates a dividend cut.
2. Safety in size
Part of the appeal of FTSE 350 dividend stocks is their financial strength. Large size and scale means that their vast cashflows tend to be predictable. It gives them the resilience to maintain their dividends through the economic cycle. And while large companies aren’t immune from making dividend cuts, their financial strength is an appealing safety factor for income investors.
- Kier is a speculative, mid cap in the Construction & Engineering industry and has a market cap of £566.8m
3. Dividend growth
Another important marker for income investors is a track record of dividend growth. Progressive (NYSE:PGR) 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.
- Kier has increased its dividend payout 8 times over the past 10 years.
4. 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.
- Kier has a rolling dividend cover of 3.71.
There are some signs of promise in the Kier share price, but the company also carries with it grave risks and uncertainties. It is worth bearing in mind that more accounting errors could be announced but, in the meantime, you can find much more information on forecasts and valuation on the group's StockReport.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.