I released my first official Canadian Dividend All-Star List on February 28th. After uploading the file, Atlantic Power announced it would be cutting it’s dividend. How’s that for bad timing.
The company cut it’s dividend by 65%. The monthly dividend has been reduced from $0.0958 to $0.033. Prior to the cut Atlantic Power had increased its dividend for 9 years in a row.
I plan to update the All-Star list monthly, but I decided that I didn’t want to have a company that cut its dividend on the list for a full month. Consequently, I updated the list earlier today instead of waiting until the end of the month. For the most recent version use the March 1st file instead of the February 28th file. You can download the list here.
This dividend cut got me thinking about ways to avoid investing in companies that cut their dividends. I like to do a complete dividend stock analysis before investing, but there are some key areas to focus on when trying to spot a dividend cut. When I invest I like to see increasing earnings, a reasonable payout ration and a yield ranging between 2.5% to 6%.
If we look at Atlantic Power we can see that they lost money in the most recent quarter and they’ve had a payout ratio of over 100%. I like to see a payout ratio of less than 60% (I’ll go a little higher if its a utility or telecom). The other quick and dirty test is the dividend yield. If a stock has a high dividend yield (over 6%) this is usually a sign that the market thinks the company may be in trouble. I’m always skeptical of yields higher than 6%. I’m not saying that every company that has a yield over 6% is going to cut its dividend, but it’s usually a warning sign. Atlantic Power’s dividend yield was well above 6%.
Lesson of the day, always be skeptical of the sustainability of dividend payment for high yield stocks.
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