Which dividends are safest – and which are most at risk?
Some big names in the British stock market seem likely to cut their dividends, with Tesco and Morrisons particularly vulnerable. But other payouts look much safer 
Neither Tesco nor Morrisons currently makes enough money to cover its dividend payments
Photo: PA
Savers who pick shares because they pay high income should tread carefully. Some giants of the British stock market are under pressure and may need to cut their dividends.
A number of techniques can be used to identify safe income stocks. Analysts look most closely at “dividend cover” and “cashflow”.
The dividend cover calculates the ratio of profits to dividends that are being handed to shareholders.
Those with a low “cover” score are vulnerable as it means the company is paying out the majority, if not all, of its profits in the form of dividends. A cover of two is reasonably safe.
Cashflow is the money available that can be paid out as dividends but can also be diverted elsewhere.
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An “operational cashflow” figure can be found in a company’s annual accounts. A negative number means more cash is being handed back to shareholders than is coming in – which can indicate that a company has been paying out dividend payments with debt, putting the dividend at risk.
The dividends under threat
We asked Stockopedia.com, a website that screens shares based on certain criteria, to name the shares that score badly on both metrics, so are therefore at risk of not being able to sustain their dividend payments.
Energy giant SSE, which yields 5.8pc, was highlighted as one of a handful of stocks that are at risk of a dividend cut.
The company’s dividend was questioned by fund managers at the start of the year, with George Godber, a stock picker for fund manager Miton, telling the Agenciesthat he believed the firm was not generating enough cash to justify its high dividends.
The firm has vowed to reduce its debts to give the company room to sustain dividend payments over the next three years, but the analysis suggests it is not out of the woods yet.
Morrisons, the supermarket chain yielding 7.4pc, also makes the list. The firm’s profits and sales are falling amid an onslaught from Aldi and Lidl.
Morrisons is the supermarket most at risk of cutting dividends, the analysis showed.
Tesco’s dividend has been called into question by analysts, who believe the supermarket giant has no alternative but to cut payments if it wants to compete with the discounters.
A management reshuffle will see a new chief executive, Dave Lewis, of Unilever, come on board in October. Mr Lewis is expected to lead a strategic overhaul of the business when he arrives and to pay for this, some analysts argue, Tesco has no alternative but to raid the dividend.
Others on the list include construction company Balfour Beatty, electronics distributor Premier Farnell, Stobart Group, the transport firm, and SThree, the recruitment company. All of these firms yield more than 5pc, except SThree at 2.8pc.
Each company could be forced to take on debt to sustain their dividend payments in the future, unless their prospects improve, according to the analysis.
Ed Croft of Stockopedia said: “Dividend cover has earned a reputation among investors and analysts as the essential dividend health metric. It gives investors a quick fix on how much a company is paying out in dividends in relation to the earnings it is generating.”
Source: Stockopedia
The safest dividend shares
The safest shares offer much lower starting yields, nearly all are offering less than 3pc. Each share named below has a dividend cover of more than two, implying it has enough earnings to pay its dividends twice over.
Bellway, the house builder, is deemed the safest. The company has benefited from Britain’s housing market recovery and passed on a spoil of its profits to shareholders, tripling its dividend payments over the past three years.
In second place is another property firm – Telford Homes – a residential property developer in London.
Completing the top three is Cranswick, which is Britain’s largest pork processor. The firm has increased its dividend each year since 2003, so is a consistent payer.
Other notable names highlighted include drinks firm Britvic and Halfords, which sells car parts.
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