Building a sustainable dividend income is a long term project no matter how you look at it and depending on the number of stocks that you actually decide to hold, one of the major keys to increasing your passive income as quickly as possible is finding stocks that have attractive features (see the 20 things we look at when judging dividend stocks) but also dumping stocks that become less attractive through time. Ideally, holding stocks that are increasing their payouts by 5% or so per year on a consistent basis is ideal. You might hold a few stocks that have little to no growth. One thing that you cannot afford though is to hold a stock that is reducing its dividend-dump it like an online UK credit card. First, I need to reassure you, very few companies are decreasing payouts these days. In fact, in the past quarter, Bloomberg reports that only 1.39% of Russell 3000 companies cut their dividends.
Which Sectors Cut Dividends?
You will not be surprised to hear that the two sectors that reduced payouts the most are communications and financials. Communication companies often top our top dividend rankings every month but also tend to pay more than they can afford to do in the long term which translates into cuts eventually unless the company can figure out a way to increase profitability very quickly. As for financials, things continue to be difficult for many of them because of the economic context.
What To Look For When Judging Your Portfolio
There are many different elements to look out for and most can be looked at rather quickly when these companies announce earnings:
-Revenues: Are they still increasing or do they expect to do so in the medium to long term futures?
-Management Discussions: When companies are considering cutting the dividend, analysts usually see it coming and will start asking about it well aheads of time, you can certainly track such discussions in earnings calls
-Earnings Per Share: Are they still increasing? Is the payout ratio being kept at a reasonable level?
I often discuss this but it’s important to not put too many eggs in one basket. You might have thought that financials were a great dividend play 5 or 10 years ago but those that put too much into that sector are certainly regretting it by now.
Some companies such as Intel (INTC) are currently seen by myself and others as sustainable companies but as they operate in a quickly changing environment, things can evolve and you would probably prefer selling once you start having serious doubts. Why? There are many good dividend candidates so you do not have to settle for stocks that could have a much