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Dividends at risk: apply some cash flow common sense

During these testing times the dividend yield can often prove illusory. While many companies are well-placed to continue supporting their dividends, many others, burdened by high levels of debt and declining cash flow, will be struggling to support the cash payments with short term survival sadly the primary focus.

Faced with a meaningful decline in its clothing and home business, Marks & Spencer (LON:MKS) has decided to cut its final dividend to save £130m. With £4bn of net debt at 30 September 2019 and a £230m interest bill last year it looks a wise move as cash flow declines.

We would like to think that Sage Group (LON:SGE), the provider of accounting and payroll software, should continue to see the cash come in. As a precaution, it has decided to suspend its recently announced share buy-back programme in order to preserve a high level of liquidity, but we think the 3% yield is reasonably safe.

Unilever’s (LON:ULVR) defensive attributes are illustrated by the modest 14% fall in share price over the past 6 months and a resilient performance in March with the shares marginally higher. Unilever has always paid a dividend and the forecast yield of 3.7%, not to mention its fantastic portfolio of everyday products, look extremely appealing in the current low interest rate environment.

It’s a different story for many smaller companies whose earnings and cash flow might be at risk. Despite the luxury of cash in the bank, Quartix Holdings (LON:QTX) prudently announced a cut to its final and special dividend this week.

Johnson Service Group (LON:JSG) is also cutting its dividend.

EMIS Group (LON:EMIS) and Curtis Banks (LON:CBP) both appear to have the desired balance sheets and cash flow profiles to be able to continue to support their dividends. But if the crisis drags on longer than expected even their dividends could be at risk.

Dividend seekers should not be swayed by forecasts, which are rendered meaningless in the current environment, and the focus should be on real balance sheet strength, debt and cash flow. Debt is fine if the cash flow is assured, as has always been the case.

Fundamental General and AIM portfolios include many of the companies mentioned in this post.

If you are looking for high levels of income from your portfolio please speak to Chris or Stephen on 01923 713890

This is an extract of an article published by our associates Investor’s Champion here.