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So what makes a good dividend?
There are many ways to define what makes a good dividend.
I use these three dividend metrics to pick good dividend paying companies:
Dividend Metric #1 – Dividend yield should beat the market average
There’s no use in investing in a company for its dividend if the dividend isn’t at least equal to the market average. Right now the JSE All Share Index average dividend yield is 2.72%, with the Small Cap Index average dividend yield being 3.22%. So that sets an easy target – dividends bigger than 3.22% are above average.
Dividend Metric #2 – The company must be able to sustain the dividend
There’s no use buying a dividend stock paying a massive dividend today – if it cannot be sustained. So firstly – for the purposes of calculating the dividend yield I ignore special or once off dividends. Secondly – I look at the company’s profits compared to the dividend.
The ratio I use is called the Dividend Pay-out Ratio. Basically it is dividends paid divided by net profits of the company.
Here we look for companies that have a dividend pay-out ratio of less than one. That means its profits are bigger than the dividends it pays out. Ideally this number should be between 0.5 and 0.75 – meaning the company keeps some profits in reserve.
If the company has a dividend pay-out ratio larger than one it means that its dividend pay-outs are MORE than the profit it makes. So it eats into its cash – and eventually won’t be able to pay dividends any more.
Dividend Metric #3 – Look for a dividend growth catalyst
I like looking at companies that have the ability to significantly increase dividend payments.
When they can surprise the markets with larger than expected dividends that usually means there’s extra upside potential in the share price.
Think about property companies for instance – if they’ve been able to weather the storm till here and things improve from pandemic lows, they will make significantly more profits. And bigger dividends will follow.
Or a mining company that’s spent all its cash on building a new mine – and now the mine is completed it can pay out the spare cash as dividends to shareholders.
Often, out of scepticism or simply a lack of research (especially on penny shares) investors miss these catalysts – and that gives you and I a great buying opportunity when we pick the right shares backed with enough research.
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This stock is one of the best dividend payers on the JSE
Bowler Metcalf Ltd (JSE: BCF) is a JSE listed packaging company.
Why I really like Bowler is the fact that the company’s paid dividends year in, year out. Over the long run they’ve been in an uptrend – in fact the company just announced its largest ever full year dividend (excluding special dividends).
What’s more - it has paid dividends to shareholders EVERY YEAR SINCE 1992!
That’s nearly 30 years of uninterrupted dividends!
This means it has paid dividends despite a bumpy transition to democracy in 1994, through the 1999 currency crisis, the DotCom Bubble, the 2008 Financial Crisis and the 2020 Covid pandemic.
Looking at this chart you can see how the company has massively grown its dividend since inception in the 1990’s.
In 2020 its full year dividend hit 46.5cps – but taking its rolling 12 month dividend which equates the effect of the latest interim dividend it is sitting on a 48.9cps dividend. That gives you a 5.2% dividend yield.
The company’s done share buybacks for the past two years. It has grown its revenue by optimising the business.
And the best of all – the company sits on a cash pile of around R248 million and no debt. Its annualised earnings is around 135.2cps – which means it pays less than half its earnings in dividends.
To find out about this company, and my four other favourite dividend paying small cap companies – check out my June issue of Red Hot Penny Shares
Here’s to unleashing real value
Editor, Red Hot Penny Shares