The suspension of dividend payments by BP, until the Gulf of Mexico disaster a £120bn company whose payments represented a significant chunk of the FTSE 100's yield, has focused minds on finding dividends elsewhere and seeking out firms who may be less susceptible to 'black swan' events that can lay waste to reputations.
And this is where the Alternative Investment Market (Aim) comes in useful. Although Aim has something of a reputation for flighty, racy constituents, it is also home to solid, growing companies whose management teams believe in rewarding loyal investors with dividends.
What to look for
As has been illustrated by the , even the biggest companies can be forced to shelve dividends. Admittedly, for companies lower down the market the risk of problems preventing payment of a dividend is arguably higher.
Smaller companies are often more focused on one sector and a smaller number of key clients which leaves them at risk of one client going under or ripping up a contract, or of a contract slipping into the next financial reporting period which can prevent payouts being made.
Nonetheless, there are several companies on the Aim market that have matured to the stage where they enjoy growing turnover and profits and are able to pay out generous dividends. The main elements to look for are companies with strong and consistent earnings growth, a decent level of cover on their dividend payments – normally considered to be at 1.5 times or preferably two times cover or more – a strong history of growing dividend payments and preferably cash on the balance sheet or at worst, minimal net debt. In some cases it is also worth investigating whether a company has a large single shareholder or small group of shareholders to whom the dividend can be a welcome extra source of income. In smaller companies, such shareholders often have considerable influence with the management team and can therefore petition for progressive dividend payments to be made a priority.
