Having a portfolio full of dividend payers is a great way to ensure a comfortable retirement. There’s just one problem. What if one -- or more -- of your holdings decide to cut their payouts?
It’s impossible to avoid dividend cuts completely. They can be minimized by doing a little detective work on each of your holdings each quarter, by making sure they generate ample cash flow to pay their obligations.
Take Cominar REIT (TSX:CUF.UN) as an example. While full-year 2016 results aren’t out yet, the first three quarters of the year saw a very concerning trend. The company did not earn enough in adjusted funds from operations to cover its generous dividend.
At least many of its shareholders take additional stock in lieu of cash payouts, which does help. Cominar’s payout is 9.9%.
Another company that doesn’t earn enough to cover its distribution is Student Transportation Inc. (TSX:STB)(NASDAQ:STB). According to Morningstar research, the company only earned $17 million U.S. in free cash flow in the last year. It pays out approximately $9.5 million U.S. a quarter in dividends. That is not sustainable. Shares currently yield 8%.
IGM Financial Inc. (TSX:IGM) and its 5.5% dividend is a little trickier. The company can afford the dividend based on trailing earnings. But investors are moving away from high-fee mutual funds, which will hurt IGM’s bottom line. The real question will be how fast the earnings deteriorate. IGM may slash the payout to free up capital to invest in parts of wealth management with more growth potential.
