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AlphaScreens: Income safety signals

Investors love dividends but it's important to diversify your income portfolio. Our screen highlights risk factors to watch out for.
AlphaScreens: Income safety signals

Blue chip companies have struggled against our stringent dividend yield screen. Given the importance of dividends to long-term compound returns, or for those taking the scrip as part of their income, it is worth checking which tests have been failed to see whether old reliable income shares may come unstuck in future.

  • Mining giant Rio Tinto (RIO) fails our dividend growth test but then it has also demonstrated its dedication to returning cash to shareholders via buybacks. It also fails the two-year EPS growth test, but this is a cyclical industry and a reminder for investors to diversify their income portfolio as pay-out levels may be under pressure in the future.
  • Insurer Prudential (PRU) fails the current year forecast EPS test and the beta requirement (its share price has been too sensitive to wider market moves in the last year). Long-term, however, benefits of the de-merger of its UK business should find their way into shareholders’ pockets.
  • There are systematic reasons why companies may fail some of our tests. For example, Target Healthcare Reit (THRL) fails the Dividend Growth and Dividend Cover tests on our small-cap screen. As Reits must pay 90 per cent of their earnings out in dividends, dividend cover inevitably falls below our threshold. 
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