As much as I like high dividend yields as an investor, I also like sustainable ways of earning passive income. Not all FTSE 100 stocks can ensure me that, but there are some that can. There are plenty of ways to figure out dividend longevity.
Dividend cover is an important metric
A good one is considering the stock’s past performance. Profitable companies are more likely to be able to sustain dividend payouts. But not all profitable companies are made equal. A company with higher dividend cover is more likely than others to be able to pay dividends in the future. Dividend cover is the company’s earnings divided by the dividends. The greater the value of the cover, the better placed a company is to pay dividends.
I think a dividend cover of two times or more is a good one to have. If it is between one and two, it means that the company may not have enough reserve funds left over after paying dividends. And if it is less than one, then it means the company cannot really afford its dividends. This is risky for its financial sustainability, not just dividend longevity.
FTSE 100 oil biggies are well placed
But there are FTSE 100 stocks that offer a good dividend cover and can offer relatively high dividend yields as well. Consider the oil giants, for instance. Both BP and Royal Dutch Shell have covers that far exceed two times. BP’s is 2.8 times and Shell’s is 2.9 times as per AJ Bell data.
BP has an above-average dividend yield as well at 4.2%, compared to the FTSE 100 average yield of 3.4%. Shell lags behind with a yield of 3% only. But for both stocks I am hopeful that their dividends will rise over time, going by the scorching increase in oil prices. Also, oil demand is only expected to rise as travel returns to pre-pandemic levels. So, in the foreseeable future I reckon that these companies should continue to do well. Which is why I have bought both stocks.
HSBC’s improving prospects
HSBC is another stock with a good dividend cover of 2.2 times. Its third-quarter results released yesterday also reflect that the company is indeed on a good financial path. During the quarter, its net profits increased by a huge 90% from the same time last year. I wrote in some detail about its financial progress earlier this week, for those who maybe interested in knowing more about it.
It also has a decent dividend yield of 3.6%, which is just a tad higher than the FTSE 100 average. And it may rise. The country’s banks are still restricted in how much dividend they can pay, which is holding back their yields. But I reckon that sooner rather than later, these restrictions will be removed too. I have been cautious about the stock for some time, but recently I became more bullish on it. It is on my investing wish list now.
A note of caution on the dividend stocks
As investors we always have to be aware that things can go wrong in a flash. We saw that when the pandemic started and the economy came to a virtual standstill. And it is still around. All things considered though, I think these are good long-term investments for my portfolio, even if there may be temporary disruptions.
